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Open Interest & Heatmap

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Understanding Open Interest #

Open interest is the total number of futures contracts held by market participants at the end of the trading day. It is used as an indicator to determine market sentiment and the strength behind price trends.

Unlike the total issued shares of a company, which typically remain constant, the number of outstanding futures contracts varies from day to day.

Open interest is calculated by adding all the contracts from opened trades and subtracting the contracts when a trade is closed.

For example, Sharon, Cynthia and Kurt are  trading the same futures contract. If Sharon buys one contract to enter a long trade, open interest increases by one. Cynthia also goes long and buys six contracts, thereby increasing open interest to seven. If Kurt decides to short the market and sells three contracts, open interest again increases to 10.

Open interest would remain at 10 until the traders exit their positions, at which point open interest declines. For example, open interest declines to nine when Sharon sells one contract. When Kurt decides to exit his position, he buys back his three contracts and brings open interest down to six. At this point, until Cynthia decides to sell her six contracts, open interest will remain constant at six.

Open interest and volume are related concepts, one key difference is that volume counts all contracts that have been traded, while open interest is a total of contracts that remain open in the market.

Traders can think of open interest as the cash flowing to the market. As open interest increases, more money is moving into the futures contract and as open interest declines money is moving out of the futures contract.

Open Interest Analysis #

Analysts typically use open interest to confirm the strength of a trend. Increasing open interest is typically a confirmation of the trend whereas decreasing open interest can be a signal that the trend is losing strength.

The idea is that traders are supporting the trend by entering the market that increases the open interest. As traders lose faith in the trend they exit the market and open interest declines.

Open interest is one variable that many futures traders use in their analysis of the markets used in conjunction with other analysis to support trade decisions. Large changes in open interest can be an indicator when certain participants are entering or leaving the market and may give clues to market direction.

How to Add Futures Open Interest #

Open Interest is an indicator under the Orderflow section in the Indicators Menu on the Top Bar

When Does The Open Interest Increase Or Decrease? #

Generally, open interest increases over the life of the futures contract (note: futures contracts expire, same with options). When futures contract months or quarters transition from one month or quarter to the next month or quarter, the future closest to expiration (called the “front month”) decreases in open interest, and the next futures contract (called the “back month”) increases.

How To Interpret Open Interest #

If price increases and open interest increases, then there is strength behind the price move higher.

If price decreases and open interest increases, then there is strength behind the price move lower.

If price increases and open interest decreases, then there is weakness behind the price move higher.

If price decreases and open interest decreases, then there is weakness behind the price move lower.

What is the Open Interest Heatmap #

GoCharting allows users to define critical levels based on the Open Interest Change % (Day over Day) to color code the chart panel and help users identify areas of high Open Interest intensity signalling a strong price action

As can be seen below, strong intensity of OI Change % is succeded by sharp price movements

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