How to Use Open Interest as an Indicator of Demand while Day Trading
Open interest has a different meaning in the stock market than in the options and futures markets, but in both cases, it gives traders useful information about demand:
In the stock market, open interest is the number of buy orders submitted before the market opens. When the open interest is high, people are ready to add shares to their positions or initiate new positions, which means that the stock is likely to go up in price.
In the options and futures markets, open interest is the number of contracts at the end of every day that have not been exercised, closed out, or allowed to expire.
Day traders don’t have open interest, because by definition, day traders close out at the end of every day. But some traders keep open interest, either because they think that their position has the ability to increase in profitability or because they’re hedging another transaction and need to keep that options or futures position in place.
If open interest in a contract is increasing, new money is coming into the market, and prices are likely to continue to go up. This is especially true if volume is increasing at about the same rate as open interest. On the other hand, if open interest is falling, people are closing out their positions because they no longer see a profit potential, and prices are likely to fall.