Tips to Use Open Interest to Gauge Market Performance
1. Monitor Changes in Open Interest: Pay attention to changes in open interest over time. Increasing open interest suggests growing market participation and interest in a particular financial instrument, potentially indicating the strength of a trend or the likelihood of a continuation.
2. Compare Open Interest with Price Movements: Analyze how changes in open interest correlate with price movements. High open interest accompanied by rising prices may indicate bullish sentiment, while high open interest with falling prices might suggest bearish sentiment.
3. Identify Support and Resistance Levels: Use areas of high open interest as potential support or resistance levels. Concentrations of open interest can indicate significant levels where traders may defend their positions, potentially influencing price movements.
4. Look for Divergences: Watch for divergences between price trends and open interest trends. Divergences may signal potential reversals or shifts in market sentiment, providing opportunities for contrarian trading strategies.