5/9/2014 Understanding Volume & Open Interest in
Commodities
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GlossaryGlossary Index1. A through C2. D through I3. J through
O4. P through R5. S through Z
Short CourseShort Course Index1. History of Futures Trading2.
What Is Traded?3. Inside Futures Exchanges4. The Futures Contract5.
Market Pressures6. Who Trades Futures?7. The Clearing House8.
Market News and Analysis9. Taking A Position
10. Taking Delivery11. Options on Futures12. A Safety Net (of
sorts)
Learning Center:Learning Center Index
Fundamental Analysis1. Fundamental Analysis Intro2. Law of
Demand3. Law of Supply4. How Supply & Demand
Determine Price5. Stocks to Use
Technical Analysis1. Importance of Chart Analysis2. What is
Technical Theory?3. How to Construct a Bar Chart4. Support &
Resistance5. Volume & Open Interest6. Chart Patterns7.
Commodity Spreads8. Technical Indicators
Technicians utilize a three dimensional approach to market
analysis which includes a study of price, volume andopen interest.
Of these three, price is the most important. However, volume and
open interest provide importantsecondary confirmation of the price
action on a chart and often provide a lead indication of an
impending change oftrend. For beginning students of the market
these two concepts tend to be somewhat confusing but are
veryimportant concepts to understand in- undertaking a thorough
analysis of market action.
Volume represents the total amount of trading activity or
contracts that have changed hands in a given commoditymarket for a
single trading day. The greater the amount of trading during a
market session the higher will be thetrading volume. As mentioned
earlier, a higher volume bar on the chart means that the trading
activity was heavierfor that day. Another way to look at this, is
that the volume represents a measure of intensity or pressure
behind aprice trend. The greater the volume the more we can expect
the existing trend to continue rather than reverse.Technicians
believe that volume precedes price, meaning that the loss of upside
price pressure in an uptrend ordownside pressure in a downtrend
will show up in the volume figures before presenting itself as a
reversal in trendon the bar chart.
Open Interest is the total number of outstanding contracts that
are held by market participants at the end of eachday. Where volume
measures the pressure or intensity behind a price trend, open
interest measures the flow ofmoney into the futures market. For
each seller of a futures contract there must be a buyer of that
contract. Thus aseller and a buyer combine to create only one
contract. Therefore, to determine the total open interest for any
givenmarket we need only to know the totals from one side or the
other, buyers or sellers, not the sum of both.
Each trade completed on the floor of a futures exchange has an
impact upon the level of open interest for that day.For example, if
both parties to the trade are initiating a new position ( one new
buyer and one new seller), openinterest will increase by one
contract. If both traders are closing an existing or old position (
one old buyer and oneold seller) open interest will decline by one
contract. The third and final possibility is one old trader passing
off hisposition to a new trader ( one old buyer sells to one new
buyer). In this case the open interest will not change.
Bymonitoring the changes in the open interest figures at the end of
each trading day, some conclusions about thedays activity can be
drawn. Increasing open interest means that new money is flowing
into the marketplace. Theresult will be that the present trend (
up, down or sideways) will continue. Declining open interest means
that themarket is liquidating and implies that the prevailing price
trend is coming to an end. A knowledge of open interestcan prove
useful toward the end of major market moves. A levelling off of
steadily increasing open interest followinga sustained price
advance is often an early warning of the end to an uptrending or
bull market.
The relationship between the prevailing price trend, volume, and
open interest can be summarized by the followingtable.
Price Volume Open Interest Interpretation
Rising Rising Rising Market is Strong
Rising Falling Falling Market is Weakening
Falling Rising Rising Market is Weak
Falling Falling Falling Market is Strengthening
It is important to understand that the commodity price chart
only records the data. In itself, it has little value. Bymonitoring
the price trend, volume and open interest the technician is better
able to gauge the buying or sellingpressure behind market moves.
This information can be used to confirm a price move or warn that a
price move isnot to be trusted. This will provide you with valuable
information to develop a suitable pricing strategy and
anappropriate production-marketing plan for your farming
operation.
[ PREVIOUS: Trend Analysis ] -- [ CONTENTS ] -- [ NEXT: Chart
Patterns ]
This educational material is provided courtesy of
KeystoneMarketing Services, a leader in commodity market
training.
For more futures market learningopportunities, check out their
interactive
CDRom training courses.
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