Open Interest (OI) is a critical metric that tracks the total number of open positions in specific contracts like Bitcoin Perpetual Futures or Ethereum options, providing insights into the current level of market participation. Unlike total trading volume, which includes closed positions, OI focuses solely on active participation, making it a key indicator for assessing liquidity and market interest.
In practical terms, open interest represents the number of active positions in the derivative market, either open options contracts or futures contracts held by traders. It decreases when contracts are closed, expired, or exercised more than opened and increases when more contracts are opened than closed, expired, or exercised. For example, if a trader buys 15 contracts of a specific Ethereum option with an open interest of 8, the new open interest becomes 23.
Traders often leverage open interest in futures and options trading to evaluate the strength of a price trend. Increasing open interest signals new contracts entering the market, affirming the trend, while decreasing open interest suggests closing positions and a potential end to the trend.
It's important to distinguish open interest from trading volume. For instance, when a trader closes 5 contracts, the volume increases by 5, but open interest decreases by the same amount. Various sources offer open interest data for different markets, such as CoinGlass, CryptoQuant, The Block, Binance, and Coinalyze, and cross-referencing data from multiple sources is advisable.
High open interest is generally considered favorable, indicating active market participation and higher liquidity. However, analyzing open interest alongside other technical indicators is crucial for a comprehensive understanding of market trends.
Open interest is neutral in its inherent nature, neither bullish nor bearish. While rising open interest can signify a strong trend, excessively high open interest may warn of a potential trend reversal, suggesting an overcrowded market. Analyzing open interest data in conjunction with other indicators empowers traders to gauge the strength of price movements, identify trend divergence, and make well-informed trading decisions.