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Open interest is a powerful indicator showing participation, sentiment, and probable price movements in the market. It is one of the key concepts that every intraday trader should know. Intraday trading involves buying and selling stocks within the same trading day, making quick decisions based on real-time market data. In this article, you'll learn what open interest is, how it's different from volume, how to correctly analyse it, and finally, how to use it to make better intraday trading decisions.
Key Takeaways
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Open interest (OI) represents the total number of active futures and option contracts in the market.
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Rising OI with price movement signals a new position buildup in the market.
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Falling OI indicates position unwinding and lower market involvement.
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When used in combination with price and volume data, OI can assist detect trend strength and direction.
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Changes in OI show the liquidity levels of an intraday trading contract.
What is Open Interest?
Simply put, open interest (OI) is the sum total of the outstanding contract numbers held at the end of every trading day. These are positions that are yet to be closed; ie, open. Open interest is a measure of the overall activity level in the futures and options market.
Every time two parties, ie, the buyer and the seller initiate a fresh position, the open interest increases by a single contract. If the traders or closing the position, then the open interest is lowered by a single contract. If the buyer or seller passes on their position to a fresh seller or buyer, then the open interest does not change.
If the OI has increased, it means that the market is seeing an infusion of money. If the OI is down, it means that the current price trend is nearing its end. In this sense, the OI is an indicator of changing trends in prices.
How To Use an Open-Interest Strategy for Intraday Trading?
Open interest is a very good indicator that shows participation underlying strong trends in the market. By analysing OI along with price and volume, intraday traders can conclude whether fresh positions are being built or existing ones are being squared off.
An increasing OI in trading with rising prices suggests strong buying interest; an increasing OI with falling prices reflects strong selling pressure. On the other hand, a fall in OI is indicative of traders closing their positions-a prelude to a slowing or reversal in trend.
OI, when used strategically, enables traders to gauge market sentiment, early potential reversals, and make better intraday decisions based on real-time activities in the market.
Examples of Open Interest in Intraday Trading
Understanding what open interest in trading means becomes easier with practical, real-market scenarios. Here are simple examples that show what is open interest in trading and how OI helps intraday traders read market trends:
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Example 1: Bullish Confirmation
Suppose Stock ABC trades at ₹1,200 with an OI of 4 lakh contracts. As the price rises to ₹1,225, the OI also increases to 4.4 lakh. This indicates fresh long positions are being built, confirming a strong bullish sentiment.
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Example 2: Bearish Reversal Signal
Nifty Futures fall from 22,300 to 22,150 while OI jumps from 1.1 million to 1.3 million contracts. This rise in OI with falling prices suggests new short positions—signalling a potential bearish trend continuation.
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Example 3: Low OI Warning
A futures contract of XYZ Steel shows low OI, such as 1 lakh contracts, even though the price charts look positive. Low OI indicates weak participation and low liquidity, which can cause poor order execution or slippage—warning traders to stay cautious.
These examples help intraday traders use OI to judge market strength, identify reversals, and choose trades with better participation and liquidity.
What is Volume?
Traders should also understand that open interest is not the same as volume. Volume refers to the number of contracts traded in a day. Volume is a reflection of the number of contracts that have occurred between seller and buyer; irrespective of whether a new contract has been created or an existing contract has been transaction. The basic difference between OI and volume is that while open interest indicates the number of contracts that are open and live, volume indicates how many were executed.
Open Interest vs. Volume
Here is a clear and simple comparison between open interest vs volume to help you understand how both indicators differ and how they are used in intraday trading:
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Parameter |
Open Interest (OI) |
Volume |
|
Meaning |
Total number of outstanding contracts that remain open at the end of the day |
Total number of contracts traded during the day |
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Reflects |
Market participation, liquidity, and active positions |
Trading activity and number of transactions over some period of time |
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Changes When |
A new position is created or an old one is closed |
Whenever a trade, or a buying/selling transaction occurs |
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Indicates |
Strength of ongoing trends and sentiment |
Short-term interest and intraday market excitement |
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Data Reset |
Carries forward to the next day |
Resets to zero at the start of each trading session |
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Usefulness |
Helps identify trend continuation or reversal |
Helps confirm price movements and breakout strength |
Price action and its role
One more parameter that one needs to keep in mind while discussing OI is the price action. Price action in trading terms is how the price of a security moves on a graph, plotted over a period of time. It refers to the upward or downward price trend of a certain security.
Most traders use volume in association with OI and price to analyse the market. The general rule of thumb is that when the price is rising, and the volume and OI are up, then the market is strong. On the other hand, even though the price is rising, if the other two parameters are down, then it is a weak market. Here’s a chart that helps you understand the rules for open interest and volume:
If you are a trader, here are some tips to use OI to see market performance:
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When the OI is on an upward trend and the price action is also seeing an upward trend, it means that the market is seeing an infusion of money. It means there are buyers and therefore, the market is considered bullish.
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When the price movement is upward but the OI is dropping, money may be exiting the market. This action temporarily raises the price and indicates shorts are exiting, which is often a sign of a potential end to the downtrend/slowdown in the uptrend, not necessarily a bear market at that moment.
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Price down, OI down typically means Long Unwinding (long holders selling to close profitable/loss-making positions). This shows a lack of new interest in the fall. While the market is bearish (prices are falling), the dropping OI indicates the selling pressure is weakening, suggesting a potential bottom/reversal.
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If the prices are on a downward trend and the OI is also dipping, it means holders are under pressure to liquidate their positions. This is a sign of a bearish market. It may also be indicative that selling may peak soon.
Tools and Resources for Open Interest Analysis
Traders rely on a combination of tools, platforms, and market resources to effectively perform an open interest analysis for informed intraday trading decisions. These tools help track changes in OI in real-time, study the strength of trends, and confirm market sentiment.
Here are some useful tools and resources:
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Trading Platforms & Charting Software: Advanced charting tools like AngelOne and other broker platforms provide real-time OI charts, price-action data, and analytical indicators for intraday analysis.
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Exchange Websites: NSE and BSE publish updated open interest data for futures and options contracts, helping traders track market-wide activity.
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Broker Research Tools: Most brokers provide OI screeners, heatmaps, and derivatives dashboards for easy monitoring of market positions.
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Financial News Portals: Websites providing real-time market updates, expert views, and OI trend commentary assist in keeping the traders well-informed.
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Third-Party Data Services: OI alerts, historical OI trends, and custom data filters are offered by dedicated analytics platforms to support advanced trading strategies.
These tools help intraday traders identify position build-up, liquidity levels, and potential trend reversals, thus enabling more confident and correct trading decisions.
Conclusion
Open interest refers to the total number of active futures or options contracts in the market. The relationship between OI and price changes provides insight into the nature of position buildup. When prices rise but OI falls, this frequently indicates short covering. These combinations help determine if a trend is strengthening or losing momentum. Along with price and volume data, OI gives information on market participation, trend strength, and mood.