The Meaning Of Open Interest In Currency Trading

Many forex traders are likely to confuse open interest and volume

. Open interest is actually the total number of entered, but not yet closed contracts. In general, open interest held by a trader is called a traders position. The essence of open interest in the market is that for every seller there is a buyer, since the total number of long open interests always equals to the number of short open interests. The key importance of open interest for the currency market (in fact, not only forex, but other financial markets as well) lies in the fact that it helps to measure the market sentiment and as result to predict the trend direction the way currency prices are going to move.

On the whole, open interest is likely to rise when more and more currency traders are entering the market, because it means influx of new money. As a result, increasing of total interest usually supports the current trend and indicates that the trend strengthening, in case the market sentiment doesnt change due the appearance of the new information.

On the contrary, total market interest decreases when the traders are taking the money away from the market if the sentiment changes. If either the downtrend or uptrend is stable, open interest is supposed to increase. This means that currency buyers domineer in an uptrend and sellers domineer in the downtrend. If open interest drops, it is a sign that the current price trend is weak. If it rises, on the contrary, the current price trend is strong enough and likely to continue notwithstanding of its direction.

If to put it together with currency trading, if the rising open interest is combined with the current medium-term trend, this is a signal that the new money has been poured into the market and the price trend is strong, as a result. If the open interest is falling during the same time period, it means that the market sentiment is not bearish. It is a sign that the current trend is going to reverse soon and the open interest will be rising in the nearest future.

On the whole, open interest and currency price movements are tightly interwoven and evaluating the open interest in the currency market can be very handy for traders since it reflects the price trends. Open interest analysis can also help to confirm the current trends weakness or strength and as a result to confirm the trade.

by: valerii

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