Decoding the Use of Open Interest For Intraday Trading | NTA

Use of Open Interest for Intraday Trading

Decoding The Use Of Open Interest For Intraday Trading

Intraday trading is one of the main sources of income for many professional traders in the stock market. These traders look to grab the opportunity of market volatility and book profits. Most of the traders carry out the intraday trading activity in the futures and options segment. While trading in the futures and options segment it is important to learn and use the data of open interest. By understanding the open interest data, correct decisions can be made in intraday trading. In this article, you will learn about using open interest intraday trading.

Let us begin by understanding the concept of open interest.

What is Open Interest (OI)?

Open interest represents the total number of outstanding contracts held by the market participants at the end of each trading session. Open interest is a measurement of the level of activity in the futures and options market. Open interest in stock increases by a single contract when there is a buy and sell trade by the participant.

When the buyer or seller passes on their position to a new buyer or seller then in such a case there would be no change in the position of open interest. When there is an inflow of money, the open interest of the stock will increase and when there is an outflow of money,the open interest of the stock will decrease. Therefore, open interest represents the changing price trend of a stock.

To understand the concept of open interest well, it is important to understand the significance of volume. Let us learn about volume in detail.

What is Volume?

Volume is the number of contracts that buyers and sellers trade among themselves. Volume represents the number of contracts traded in a day. The difference between open interest and volume is that open interest represents the number of open contracts held by the traders whereas volume is the number of contracts executed.

The volume and open interest in stock must be monitored together. If the price of the stock is rising along with the rise in the volumes and open interest, it means that the stock is in a strong upward trend. Similarly, if the stock price is rising with open interest and volume declining, it is a sign that the stock will get weaker.

How to Interpret Volume and Price Together

  • When the volume and price of the stock are increasing, it means the stock is bullish and can rise further.
  • When the volumes are decreasing and along with that price of the stock is also decreasing, it means that stock can reverse and bearish mode can end soon.
  • When the volume in stock is increasing and along with that the price of the stock is decreasing, it is a bearish sign and the stock can fall further.
  • When the stock price is increasing with declining volumes, it is a reversal sign and the bullish mode of the stock can end soon.

The above analysis will help the traders in taking the intraday position on the basis of action in price and volume. By correlating the volume and open interest traders can make consistent profits with their trading positions. Let us now learn about how to use open interest in intraday trading.

How To Use Open Interest For Intraday Trading

  • When the stock price is rising and with that open interest in the stock is also rising then it is a sign of infusion of money in the market. This means that the stock is in a bullish phase and has more buyers.
  • When the stock price is rising and open interest is falling, it is a sign that money is exiting the market. Generally stock enters a bearish phase in such a scenario.
  • If the open interest is high and the price of the stock is falling then it is a sign of a bearish market. This situation occurs when the traders who bought the stock at higher levels are facing losses. This situation generally has a panic selling in the stock.
  • When the stock price is falling and along with that open interest is also falling, it means that the position holders in the stock are under pressure to close their position. This trend suggests that the selling in the stock may end soon.

From the above one can learn using the open interest for intraday trading. The open interest data is available on the website of the National Stock Exchange (NSE). To learn more about the stock market you may visit Nifty Trading Academy. We are the leader in providing free stock market education. Our blogs and articles are free of cost and you can anytime read them. We aim to enhance financial literacy about the stock market through our website. Subscribe to our website and enjoy the daily dose of stock market information at no cost.