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Open Interest

Open Interest (OI)​

Open Interest (OI) is a measure of how many futures or options contracts are currently outstanding in the market. It tells traders how many contracts remain “open” or unclosed. Unlike volume, which counts all trades executed during a day, OI shows the number of contracts still in play. OI increases when new contracts are created and decreases when contracts are settled or squared off.

For AlgoTest traders, understanding OI can offer insights into market liquidity and the strength of current trends when creating strategies using the Strategy Builder.

How Open Interest Works​

OI is counted when new contracts are created. For example, if Arjun buys 5 contracts and Neha sells 5 contracts, the OI will be 5 because these are new contracts entering the market. However, if John buys Neha’s 5 contracts, the OI doesn’t change since no new contracts are added—just a transfer of existing ones.

Here’s a breakdown of a simple scenario:

  • Monday: Arjun buys 6 futures contracts, Varun buys 4, and Neha sells all 10. The OI is 10.
  • Tuesday: Neha sells 8 contracts to John, but no new contracts are created. OI remains 10.
  • Wednesday: Arjun and Varun increase their positions, and John adds 7 contracts, bringing the OI to 15.

OI and Market Sentiment​

  1. Increasing OI with rising prices: This indicates new long positions, which is a bullish sign.
  2. Increasing OI with falling prices: This suggests new short positions, signaling bearish sentiment.
  3. Decreasing OI with rising prices: This often indicates short-covering, where traders are closing their short positions.
  4. Decreasing OI with falling prices: Known as long unwinding, where long traders are closing positions, often marking the end of a bullish trend.

Why OI Matters​

High OI typically indicates a liquid market, meaning traders can enter and exit positions easily. This liquidity reduces the risk of slippage (the difference between expected and actual execution prices) and allows for tighter bid-ask spreads.

For AlgoTest users, OI can be used to gauge market sentiment and identify trends, particularly when developing futures or options strategies. For example, if you see a significant rise in OI accompanied by a price increase, it might suggest the beginning of a strong uptrend.

Using OI on AlgoTest​

In the Simulator, traders can backtest strategies that involve monitoring OI to confirm trends or predict potential reversals. For instance, a rising OI during a price decline might indicate bearish strength, allowing traders to short the market using futures contracts.

Conclusion​

Open Interest provides valuable insights into the strength of market trends and liquidity. By incorporating OI data into your AlgoTest strategies, you can make more informed trading decisions and better manage your market positions.