Price, volume and open interest (OI) are the most important metrics to analyze when you’re doing futures trading.

Among these metrics, price is the most important metric, and any changes in volume / open interest with respect to price can decide the trend and strength of the market.

Volume relates to the amount of trading that is occurring, for every seller, there is a buyer so it’s sometimes hard to determine who is a buyer and who is a seller. By analyzing the patterns of price, open interest and volume we can determine the next move of the market.

Source: Skew.com, Data from 16^thFeb to 15^th Mar 2020 

Volume measures the pressure behind a price trend and typically volume will precede any change in price. Substantial changes in volume could bring in a rise or fall in prices.

Open Interest (OI) is the total number of outstanding positions by the recorded time point, given cryptocurrencies never sleep this metric is constantly changing 24/7. For each buyer, there is a seller, combining both gives you the value of Open Interest as a metric.  Open interest indicates capital flowing in and out of the market. In traditional futures markets, traders closely monitor changes in open interest. Analysts and traders typically use the open interest as an indicator to determine market sentiment and the strength behind price trends. As more capital flows into a futures contract, open interest increases. Conversely, more capital flows out, it declines. Therefore, increasing open interest is a confirmation of a bull market, whereas decreasing open interest signals a bear market.

Source: Skew.com, Data from 16^thFeb to 15^th Mar 2020

Typically, traders track the changes in price, volume, and open interest to analyze the prevailing market sentiment. Table 2 shows an interpretation of market behavior as a result of changes in the factors above.  

*Interpretation of market behavior as price, volume, and open interest changes

Situation 1 indicates that price, volume and open interest are rising, indicating a good market and that longs are in favor.

Situation 2 suggests short sellers are covering their positions, however, the general market trend indicates a weak market as volume and open interest are decreasing.

Situation 3 shows that price is declining, however open interest and volume are on the rise. This indicates that very aggressive short selling is entering the market.

Situation 4 indicates that if the price, volume, and OI are in a declining mode, signals that long position holders are winding off their short positions and likely be the end of downtrend when all sellers sold their positions.  This indicates a strong market. However don’t confuse the strong market with a bullish outlook, we’re talking futures here. You can be profiting as a bear or a bull, the bearish/bullish scenario outlooks will be covered below, however.

Conclusion

Understanding price, volume, and open interest is typically done before charting and technical analysis patterns so feel free to use this information for educational purposes only if you’re new.

With experience, these metrics will provide you the most simple form of being able to judge the price reversal or continuation of a trend.

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