5/9/2014

Understanding Volume & Open Interest in Commodities

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Fundamental Analysis
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Determine Price
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Technical Analysis
1. Importance of Chart Analysis
2. What is Technical Theory?
3. How to Construct a Bar Chart
4. Support & Resistance
5. Volume & Open Interest
6. Chart Patterns
7. Commodity Spreads
8. Technical Indicators

Understanding Volume & Open Interest in Commodities

Learning Center
Technicians utilize a three dimensional approach to market analysis which includes a study of price, volume and
open interest. Of these three, price is the most important. However, volume and open interest provide important
secondary confirmation of the price action on a chart and often provide a lead indication of an impending change of
trend. For beginning students of the market these two concepts tend to be somewhat confusing but are very
important concepts to understand in- undertaking a thorough analysis of market action.
Volume represents the total amount of trading activity or contracts that have changed hands in a given commodity
market for a single trading day. The greater the amount of trading during a market session the higher will be the
trading volume. As mentioned earlier, a higher volume bar on the chart means that the trading activity was heavier
for that day. Another way to look at this, is that the volume represents a measure of intensity or pressure behind a
price trend. The greater the volume the more we can expect the existing trend to continue rather than reverse.
Technicians believe that volume precedes price, meaning that the loss of upside price pressure in an uptrend or
downside pressure in a downtrend will show up in the volume figures before presenting itself as a reversal in trend
on the bar chart.
Open Interest is the total number of outstanding contracts that are held by market participants at the end of each
day. Where volume measures the pressure or intensity behind a price trend, open interest measures the flow of
money into the futures market. For each seller of a futures contract there must be a buyer of that contract. Thus a
seller and a buyer combine to create only one contract. Therefore, to determine the total open interest for any given
market we need only to know the totals from one side or the other, buyers or sellers, not the sum of both.
Each trade completed on the floor of a futures exchange has an impact upon the level of open interest for that day.
For example, if both parties to the trade are initiating a new position ( one new buyer and one new seller), open
interest will increase by one contract. If both traders are closing an existing or old position ( one old buyer and one
old seller) open interest will decline by one contract. The third and final possibility is one old trader passing off his
position to a new trader ( one old buyer sells to one new buyer). In this case the open interest will not change. By
monitoring the changes in the open interest figures at the end of each trading day, some conclusions about the
days activity can be drawn. Increasing open interest means that new money is flowing into the marketplace. The
result will be that the present trend ( up, down or sideways) will continue. Declining open interest means that the
market is liquidating and implies that the prevailing price trend is coming to an end. A knowledge of open interest
can prove useful toward the end of major market moves. A levelling off of steadily increasing open interest following
a sustained price advance is often an early warning of the end to an uptrending or bull market.

Sponsor

The relationship between the prevailing price trend, volume, and open interest can be summarized by the following
table.

Price

Volume

Open Interest

Interpretation

Rising

Rising

Rising

Market is Strong

Rising

Falling

Falling

Market is Weakening

Falling

Rising

Rising

Market is Weak

Falling

Falling

Falling

Market is Strengthening

It is important to understand that the commodity price chart only records the data. In itself, it has little value. By
monitoring the price trend, volume and open interest the technician is better able to gauge the buying or selling
pressure behind market moves. This information can be used to confirm a price move or warn that a price move is
not to be trusted. This will provide you with valuable information to develop a suitable pricing strategy and an
appropriate production-marketing plan for your farming operation.
[ PREVIOUS: Trend Analysis ] -- [ CONTENTS ] -- [ NEXT: Chart Patterns ]

This educational material is provided courtesy of Keystone

Marketing Services, a leader in commodity market training.

For more futures market learning

opportunities, check out their interactive
CDRom training courses.

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Understanding Volume & Open Interest in Commodities

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