What is Open Interest in Share Market?
Intraday
trading is one of the exciting modes of generating quick profits from the
movement of stocks or indexes. However, it is equally risky if you are not able
to predict price movement accurately. If the price movement of the security is
not as per the prediction, you may end with losses too. That is why it is
important to deploy correct strategies in trading. One of the popular strategies
for intraday trading is the open interest strategy. In this article, you will
learn about all the important details regarding open interest in the share
market.
What is Open Interest?
Open
interest is linked to stocks and indexes that form part of derivative trading
i.e. futures and options. Open interest represents the total number of
outstanding open contracts during the end of a trading day. When a fresh
position is taken, the open interest rises. Similarly, when the open position
is closed, the open interest falls.
Therefore,
when the open interest for stock goes up it means that the stock has more
buyers. Likewise, when the open interest goes down, it means that the investors
are closing their positions and the current price movement would reverse. Thus,
by tracking the open interest of stocks you can identify the expected price
trend in the coming days.
How Open Interest Can Be Used in Intraday
Trading?
Open
interest is one of the powerful tools for intraday trading along with volumes.
The intraday traders can use open interest for their benefit in the following
ways;
· If the open interest is rising and along with
it the stock price is also rising, then the stock is in a bullish trend.
· If the open interest is decreasing and along
with it the stock price is increasing, then the stock is going to turn bearish.
· If the open interest is increasing and the
price of the stock is declining sharply, the stock is in bearish mode and investors
are likely to sell it in panic mode.
· If the open interest is decreasing and along
with it the stock price is also decreasing, then the stock is in a bearish
trend.
The
traders use open interest along with volume and price action to determine the
trend of the market. After identifying the trend, you need to take the appropriate
position. The data regarding open interest is available on the NSE website or
the broker’s website/application. If you are new to the stock market and want
to learn trading strategies like open interest strategy, you can get in touch
with Indira Securities. We are one of the fastest growing brokers in India. You
may even consider opening a demat account with us.