What is open interest?
Open interest represents the total number of derivative contractsjust like opportunities and futurewhich has not yet been closeddelivered or utilized.
Specifically, it is the number of contracts that stay active on the market and unliquidated.
Its calculation method can be summarized quite simply: the calculation of open interest is done by adding all open contracts together and subtracting closed contracts.
The open interest, in green, highlights the liquidity peaks at $54,000. This signal may indicate that bitcoin may follow a further upward trend in the coming weeks.
What interpretation are we to make of it?
To illustrate this, let’s take two concrete examples with Bitcoin in the perpetual market:
If you buy (take a long position) for $5,000 of Bitcoin in this market, Open Interest increases by $5,000.
If you close then this position, Open interest falling of same amount.
Likewise if you sell short (open a short) to $5,000 of Bitcoin, open interest increase also of $5,000.
These examples show that Open Interest is not an indicator for market direction (rise or fall), but rather of its intensity and dealer engagement.
It tells us when and to what extent market participants (buying “bulls” and selling “bears”) take position.
In addition, the development of Open Interest helps us interpret the strength of a market trend. For example, by looking at the actors withdraw from the market with a view to a potential correction Or stagnation.
Rising and falling open interest
For example one Growing open interest in a bull market may mean that the trend is supported by an increased business commitment, which may indicate its continuation.
Conversely, a Declining open interest can report one weakening of the trend. And therefore a likely future reversal.
Where to find the open interest indicator?
Open interest is a widely available indicator found on most trading platforms and exchanges to offer derivative contracts.
It often appears next to prices and trading volumeswhich allows traders to analyze it in conjunction with other indicators.
You can also find this indicator in a simpler way on Coinglass.
As a reminder, using one indicator alone can lead you to misinterpret multiple market signals. Using open interest in trading involves integrating it into global technical analysis.
General open interest increases or decreases. Depends on the indicator directionwill the information communicate specific signals.
When we observe a increase in open interestthis generally means the entry of new contracts on the market.
This trend may indicate a intensification of activities buying or selling, where traders and investors establish new positions.
Thus one growth of open interest can reinforce the current trend, whether it is up or down.
What are the advantages and disadvantages of open interest?
Open interest, as an indicator, provides several significant benefits to traders:
- Market Strength Indicator: Open interest provides valuable insight into the strength or weakness of a market trend. Growing open interest generally indicates a strong and sustained trend.
- Confirmation of trends: It helps to confirm the validity of price trends. For example, an increase in open interest for an uptrend confirms the strength of this trend.
- Forecast for turning points: A notable change in open interest can signal an impending trend reversal, allowing traders to adjust their strategies.
- Liquidity and volatility: It provides insight into an asset’s liquidity and volatility, crucial factors for trading decisions. However, there are also disadvantages to using open interest:
- Complexity of interpretation: For beginners, correctly interpreting open interest can be complex, requiring an understanding of the nuances of the market.
- Delay of information: Open interest is updated daily, which may cause some delay in information, especially in highly volatile markets.
- Not specific to directions: It does not provide direct information about the direction of price movement, which requires further analysis for complete interpretation.
Our opinion on open interest
Open interest is a market analysis tool that can prove very useful, especially for those who want to understand the dynamics of market trends.
Its ability to reveal the strength of trends and to anticipate chargebacks potential makes it an indicator of choice for traders.
However, this indicator remains quite sophisticated and its complexity can pose a challenge to less experienced traders.
It is therefore important for beginners to gradually become familiar with open interest, by combining it with other indicators and practicing the analysis in different market contexts.