How to use Trading Volume and Open Interest to assess the market?

2023-03-09, 01:52

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![](https://gimg2.gateimg.com/image/article/167832597911.png)
## Volume and Open Interest
 
Trading volume and open interest are two commonly used indicators in the market, which can help us understand the market's activity level, market sentiment, and the views of market participants on future market trends. They provide important information about the market situation, and for investors, this information can be used to develop trading strategies and risk management.

### 1. Introduction
 
**Volume**
 
In the spot market, the volume represents how often shares change hands between buyers and sellers. In the derivative market, the volume refers to the number of contracts traded in a given period. The greater the volume, the more interest there is in the coins. Investors sometimes view volume as an indicator of the strength of a particular price movement. More volume also means that there is greater liquidity in the market; this is desirable from a short-term trading perspective, as it means that there is an abundance of buyers and sellers in the market.
 
**Open interest**
 
Open interest is the number of options or futures contracts that are held by traders and investors in active positions. These positions have been opened, but have not been closed out, expired, or exercised. Open interest decreases when buyers and sellers of contracts close out more positions than were opened that day. To close out a position, a trader must take an offsetting position, or exercise their option. Open interest increases once again when investors and traders open more new long positions or sellers take on new short positions in an amount greater than the number of contracts that were closed that day.

### 2. Formula & Code
1.Calculate rolling mean of one week and one month weeklyMean = MEAN(Volume or Open Interest, 7Days)
monthlyMean = MEAN(Volume or Open Interest, 30Days)

2.Calculate weekly mean divide by monthly mean ratio
meanRatio = weeklyMean/monthlyMean

### 3. Interpretation
 
Technical analysts use open interest, along with other metrics, to gauge the strength of a market trend. Increasing open interest indicates that new traders are entering the market, and may be used to confirm a current market trend. Declining open interest shows that traders are closing their positions, and the current trend may be weakening.
 
The interpretation of volume has been part of the trading culture from its beginning. Volume is always considered in combination with price movement:
![](https://gimg2.gateimg.com/image/article/1678326303DCBOT1.png)
Open interest is a concept unique to futures markets, but helps to explain the depth of the market as well as trader expectations. New interest in a market is the result of new buyers and sellers meeting, which increases the open interest, the net of all outstanding contracts being traded. The following table explains the combinations of buyers and sellers that changes open interest:
![](https://gimg2.gateimg.com/image/article/1678326347DCBOT2.png)
The traditional interpretation of changes in volume and open interest (for futures markets) can be summarized as:
![](https://gimg2.gateimg.com/image/article/1678326376DCBOT3.png)
There is a traditional interpretation for the combined movement of price direction,volume, and open interest.
![](https://gimg2.gateimg.com/image/article/1678326412DCBOT4.png)
Reference：Trading Systems and Methods, + Website by Perry J. Kaufman, Wiley; 5 edition (January 29, 2013)

### 4. Application
 
The following provides BTC data for January 2023 as a reference example. When the ratio of the 7-day moving average to the 30-day moving average is greater than 1, the current status is determined to be rising. Conversely, it is falling. Specific parameters can be optimized and adjusted based on trading frequency or trading results. The main purpose is to judge the state of the market by analyzing the price, trading volume, and open interest, and thus better specify investment strategies and risk control.

**Price and Trading Volume**
![](https://gimg2.gateimg.com/image/article/1678326478DCBOT5.png)
In the above graph, the green line represents an upward price trend supported by trading volume, while the red line represents a weak correction where both price and volume are falling.
 
**Trading Volume and Open Interest**
![](https://gimg2.gateimg.com/image/article/1678326523DCBOT6.png)
In the above chart, the blue line represents a crowded phase where both trading volume and open interest are decreasing, while the yellow line represents a slow accumulation phase where trading volume is decreasing but open interest is increasing. The green line represents a trend confirmation phase, while the red line represents closing positions at high prices.
 
**Price, Trading Volume, and Open Interest**
![](https://gimg2.gateimg.com/image/article/1678326561DCBOT7.png)
In the above chart, the red line represents a downward trend where long positions are forced to close due to decreasing prices, and waiting for short positions to close to signal the end of the downward trend. The green line represents a new group of buyers entering the market, where both price, trading volume, and open interest are increasing.

In summary, we can first use trading volume to confirm if the trend has volume support. If there is an obvious deviation, we can reduce positions or exit. We can also wait for the trend direction in the slow accumulation phase through the relationship between trading volume and open interest, and reduce holding positions when closing positions. Finally, by using price, trading volume, and open interest, we can determine if there are new buyers and sellers entering the market, making the trend more sustainable, and helping to better grasp the timing of adjusting positions. DCBot's encrypted market environment analysis report will periodically help investors determine the current market situation and provide better investment decision suggestions.

***Disclosure: This article is from DCBot, Crypto Hedge Fund who provide CTA, statistical arbitrage, algorithmic trading, and high-frequency trading. For more information on DCBot, please visit [https://dcbot.ai/](https://dcbot.ai/ "https://dcbot.ai/")***

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<div>Author:** DCBot**
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