So, you’re diving into the world of crypto trading, huh? Well, buckle up because there’s a term you’ll want to wrap your head around: open interest (OI). It might sound a bit fancy, but don’t worry, we’ll break it down into plain English for you.
What is Open Interest?
Alright, let’s get down to business. Open interest is essentially the total number of open contracts for a particular asset, like Bitcoin or Ethereum, at a given point in time.
Put simply, opening a new position on Futures markets increases open interest. Alternatively, closing existing Futures positions decreases open interest.
OI is a key indicator of market sentiment and can give you a glimpse into where the price might be headed next.
Open Interest Cheat Sheet
There are several reasons why traders would be opening or closing positions. The concept and consequences are a bit different and more confusing to grasp compared to other chart indicators such as RSI or Volume, but you can master Open Interest with our handy cheat sheet:
Price UP, Open Interest UP – This is bullish. Both price and OI going up means traders are opening new longs. This is normal market behavior signifying a sustained bullish rally.
Price DOWN, Open Interest DOWN – This is not necessarily bullish nor bearish, but it can indicate that the current price downtrend is weakening. Positions getting closed means long position holders are forcibly getting liquidated (squeezed), or short traders are closing their positions in profit, expecting a price reversal.
Price UP, Open Interest DOWN – This is somewhat bearish, as it generally indicates that price increase is not being sustained with traders opening new positions. OI going down while price goes up can mean shorts are getting closed, but new longs aren’t being opened – neither of which is bullish. Traders not “betting” that price will continue going up does not indicate a healthy, bullish rally, does it? This means the price uptrend may be weakening, and the asset may retrace its gains.
Price DOWN, Open Interest UP – This is bearish. Traders are betting the price will continue going down by opening new short positions. Indicates a strong bearish price direction.
Now that you got the basics, let’s keep this in mind:
- Open interest increasing always means new positions are opening, and in the same direction as asset price.
- Open interest decreasing means positions are being closed. This can either be profit taking, or forced liquidations of margin/leverage positions.
- Short squeeze and long squeeze (OI going down) can be powerful tools to indicate a market reversal, even on low time frames.
- Open interest divergences are generally bearish.
Where to see Open Interest?
There are many charting and analysis tools where you can see open interest. We’ll highlight two, both of which are free to use.
1. Coinalyze
Coinalyze is a free tool and one of the best places to find accurate open interest data. Creating an account is optional, but your chart indicators will not be saved unless you are logged in.
You can view OI on Coinalyze on the following links:
You can choose from hundreds of different assets, not just Bitcoin. Additionally, you can also view open interest by exchange. For beginner traders, it might be wise to simply look at aggregate OI across all exchanges. More advanced traders may be able to spot certain patterns by only looking at specific exchanges, such as Binance, Bybit, Deribit, or others.
2. TradingView
TradingView is the top charting tool in the market, one that doesn’t need an introduction. It has a great deal of community scripts and indicators, and you can find several Open Interest indicators on TradingView.
Open Interest Suite by Leviathan is our favorite one, but you can try and experiment with others to see if they are more to your liking. Keep in mind that TradingView indicators for OI come with fewer features compared to Coinalyze. For example, you will not be able to see OI per specific exchange.
Other tools that allow you to view open interest include CoinGlass and CryptoQuant. Keep in mind you might need paid accounts to access most helpful features.
How to Use Open Interest Successfully?
Like every other technical indicator, Open Interest should be used in confluence with other indicators or analysis. You should not rely on OI alone, exactly like you shouldn’t use RSI or CVD or MACD as sole reasons for entering into positions. Use multiple indicators for confluence and confirmation.
When used correctly, OI can be a powerful tool for gaining a deeper glimpse of the market direction. One of the best ways to use OI is for determining whether price action is being sustained with new positions opening, or whether it is simply a so-called squeeze (positions forcibly closing through liquidations).
A sudden large increase in OI can indicate new money is going into the market. On the opposite side, large decrease in OI can suggest money is leaving positions, and the current price trend may be coming to an end.
OI is not the same as Volume, but these two indicators can work very well in conjunction. Alongside OI, traders often use CVD (Cumulative Volume Delta), funding rates, liquidation heatmaps and more for confluence and confirmation.
Open Interest FAQs
- What's the difference between volume and open interest?
Volume and open interest are both metrics used to assess the activity and liquidity of options and futures contracts.
Volume refers to the total number of trades executed within a given trading day. It serves as a crucial indicator of the strength and interest in a specific trade. Essentially, volume tells you how many contracts changed hands during the trading session, providing insight into the level of activity in the market.
On the other hand, open interest represents the total number of contracts held by traders in active positions, indicating the number of contracts available to be traded. Unlike volume, open interest is not updated throughout the trading day but is instead calculated once per day. It reflects the ongoing interest and commitment of traders to particular positions.
Traders rely on changes in volume and open interest to assess market liquidity and anticipate potential price movements. While volume provides a real-time snapshot of trading activity, open interest offers a broader view of market sentiment and the number of participants involved in a particular trade.
- What does a high open interest mean?
A high open interest signifies that a substantial number of traders have established active positions in a specific options or futures contract.
- When open interest increases over time, it indicates that new traders are entering into positions, suggesting an influx of capital into the market.
- Conversely, if open interest decreases over time, it suggests that traders are beginning to unwind or close their existing positions.
Monitoring changes in open interest can provide valuable insights into market sentiment and potential shifts in trading activity. When open interest rises, it typically indicates growing interest in maintaining a trend, potentially reinforcing the current market direction. However, excessively high open interest levels may signal an overcrowded trade, prompting traders to view it as a potential precursor to a trend reversal.
- Why is open interest important for trading?
Open interest data plays a crucial role in Bitcoin futures trading. Here's why it's essential:
1. Market Sentiment Analysis: Monitoring changes in open interest helps traders gauge market sentiment. Increasing open interest indicates bullish sentiment, while decreasing open interest may signal a bearish market.
2. Liquidity Assessment: Open interest is closely tied to liquidity. Higher open interest typically means increased trading volumes and liquidity.
3. Price Trend Confirmation: Open interest data can validate prevailing price trends. For instance, if Bitcoin's price is rising and open interest is increasing, it supports the price movement with more traders opening positions, boosting confidence in the trend.
4. Identification of Potential Breakouts: Changes in open interest signal potential breakouts or trend reversals. A significant increase in open interest, combined with rising trading volumes, may indicate an imminent breakout.
5. Risk Management: Open interest data aids in managing risk. By monitoring open interest, traders assess market participation and liquidity levels. Changes in open interest also highlight periods of heightened volatility or uncertainty, allowing traders to adjust risk management strategies accordingly.
Overall, incorporating open interest analysis into Bitcoin futures trading strategies enhances decision-making and improves the trading experience.
Feel free to let us know if you have additional questions about open interest.
Conclusion
Analyzing open interest can significantly boost your trading success, particularly for options and futures traders. But like any indicator, OI is not infallible and can occasionally produce false signals. Other market events can always invalidate even the best of trading analysis.
It’s crucial to practice risk management and not rely solely on open interest. Successful traders combine multiple tools, such as price action analysis, chart patterns, moving averages, and other market data, into their trading systems. By finding confluence among these tools, you can make better informed decisions and enter trades with higher confidence.
