CBOT - Chicago Board of Trade
Technicians (of Technical Analysis) gauge the quality of a market move by comparing daily changes in open interest in the futures market with the direction of the futures price. A 10% change in open interest deserves serious attention, while 25% change often gives major trading messages.
Open interest trading rules
When open interest rises
- During a price rally - a bullish signal. New longs have entered the market. It is safe to add to long positions.
- While futures prices fall - a bearish signal. New short positions have been established. It is safe to sell short.
- While futures prices are in a trading range - a bearish signal. Commercial hedgers are more likely to sell short than speculators.
When open interest falls
- During a price rally - a bearish signal. Rally is due to short covering rather than new long positions. So sell and get ready to sell short because participants are getting out of the market.
- During a decline - a bullish signal. It suggest that the sell off was due to long liquidations that eventually will be exhausted. So cover shorts and get ready to buy.
- In a trading range - a bullish signal. It identifies short covering by major commercial interests, particularly if open interest is falling sharply.
When open interest is flat
- During a rally - a signal to tighten stops on long positions and avoid new buying
- During a decline - best to tighten stops on short positions
- In a trading range - this does not contribute any new information
