Open interest and trading volume for futures contracts
Most definitely holding positions overnight would be the correct answer. Just knowing how big Goldman Sachs is and there are several other Commodity Index Fund firms, what do you think this is doing to the open interest of a contract when they exit their positions? The open interest has to be reduced significantly for that contract month. Where did the open interest go?
To the next contract month in the cycle because of rules on how they must invest in the markets. I would like to thank Moore Research www. Figure 1 shows the Crude Oil market and the first 7 contract months in the cycle. Each contract month has its own volume and open interest. Notice the volume in the November contract is , contracts while the December contract is , For a day trader you would like to trade in the most actively traded contract.
At this time you would want to be day trading the November contract until there is more daily volume in the December contract than the November contract. As a day trader you may wish to keep an eye on the open interest as well.
While you will want to trade the most actively traded month you may want to be aware that since the open interest is higher in December than November that a roll over is imminent in the next few days. For a swing trader person holding positions overnight you can view this page a little differently. By looking at the open interest we can see some of the larger traders have already left the November contract and are now positioned in the December contract even before the volume has rolled over.
You place your order using the November contract. Now you are filled on your order and within the next day or two you will have to exit that November contract and roll over to the December contract to avoid delivery of 1, barrels of Crude Oil. Now you will have another transaction cost commission and possibly miss getting filled on your December contract if price does not come back to your level with your new order. If you had been looking at the open interest you would have known that the larger traders had left November already and you would have placed your order in the December contract.
This would allow you to keep your Crude Oil contract until the next expiration period instead of dealing with the one in just a few days. Figure 2 shows a chart with the open interest of the November contract upper chart of volume with solid black line with participants leaving this contract black line turning down. Figure 3 shows where the participants who left November went to and that would be December Crude Oil.
Notice how the solid black line in the upper chart of volume is now turning up showing open interest increasing in the December contract. Whether you are a day trader or a swing trader, understanding open interest and volume can help you select the contract you wish to trade.
By reducing your transaction cost and possibility of missing your trade you can position yourself by skipping over rollovers. Keep in mind that you can trade any contract month in the cycle, not just the first two contracts listed. As long as the contract month has sufficient volume you can trade it.
Disclaimer This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader.
The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results. When more investors enter positions, and more interest exists, it shows consensus with regards to price movements. The chart below describes how price, volume and Open Interest analysis work together. Before the recent bearish phase, price moved higher for a few days, but volume and Open Interest were very low — both metrics saw a significant drop.
Once price started to move lower, volume picked up fast and Open Interest followed shortly after. During the bearish trend, volume and Open Interest kept increasing. Then, as the bearish trend slowed down, volume declined, and Open Interest was flat.
Price volatility increases and just keeps moving sideways. Open Interest and volume analysis can often be a leading indicator when it comes to identifying market turns and reversals. Particularly at the key support and resistance levels, a change in Open Interest and volume can be probable predictors and warn traders in advance that market sentiment is undergoing a change. The chart of WTI Crude Oil below shows how volume, Open Interest, and price analysis can help improve the understanding of market activity: A new trend is supported by rising volume and increasing Open Interest; fading momentum after a trend is foreshadowed by a drop in Open Interest and a turn in volume.
There is a risk of loss in futures trading. Past performance is not indicative of future results.