open interest

WHAT OPEN INTEREST TELLS US

A CONTRACT HAS BOTH A BUYER AND A SELLER, SO THE TWO MARKET PLAYERS COMBINE TO MAKE ONE CONTRACT. THE OPEN-INTEREST POSITION THAT IS REPORTED EACH DAY REPRESENTS THE INCREASE OR DECREASE IN THE NUMBER OF CONTRACTS FOR THAT DAY, AND IT IS SHOWN AS A POSITIVE OR NEGATIVE NUMBER. AN INCREASE IN OPEN INTEREST ALONG WITH AN INCREASE IN PRICE IS SAID TO CONFIRM AN UPWARD TREND. SIMILARLY, AN INCREASE IN OPEN INTEREST ALONG WITH A DECREASE IN PRICE CONFIRMS A DOWNWARD TREND. AN INCREASE OR DECREASE IN PRICES WHILE OPEN INTEREST REMAINS FLAT OR DECLINING MAY INDICATE A POSSIBLE TREND REVERSAL.

RULES OF OPEN INTEREST

IF PRICES ARE RISING AND OPEN INTEREST IS INCREASING AT A RATE FASTER THAN ITS FIVE-YEAR SEASONAL AVERAGE, THIS IS A BULLISH SIGN. MORE PARTICIPANTS ARE ENTERING THE MARKET, INVOLVING ADDITIONAL BUYING, AND ANY PURCHASES ARE GENERALLY AGGRESSIVE IN NATURE.
IF THE OPEN-INTEREST NUMBERS FLATTEN FOLLOWING A RISING TREND IN BOTH PRICE AND OPEN INTEREST, TAKE THIS AS A WARNING SIGN OF AN IMPENDING TOP.
HIGH OPEN INTEREST AT MARKET TOPS IS A BEARISH SIGNAL IF THE PRICE DROP IS SUDDEN, SINCE THIS WILL FORCE MANY 'WEAK' LONGS TO LIQUIDATE. OCCASIONALLY, SUCH CONDITIONS SET OFF A SELF-FEEDING, DOWNWARD SPIRAL.
AN UNUSUALLY HIGH OR RECORD OPEN INTEREST IN A BULL MARKET IS A DANGER SIGNAL. WHEN A RISING TREND OF OPEN INTEREST BEGINS TO REVERSE, EXPECT A BEAR TREND TO GET UNDERWAY.
A BREAKOUT FROM A TRADING RANGE WILL BE MUCH STRONGER IF OPEN INTEREST RISES DURING THE CONSOLIDATION. THIS IS BECAUSE MANY TRADERS WILL BE CAUGHT ON THE WRONG SIDE OF THE MARKET WHEN THE BREAKOUT FINALLY TAKES PLACE. WHEN THE PRICE MOVES OUT OF THE TRADING RANGE, THESE TRADERS ARE FORCED TO ABANDON THEIR POSITIONS. IT IS POSSIBLE TO TAKE THIS RULE ONE STEP FURTHER AND SAY THE GREATER THE RISE IN OPEN INTEREST DURING THE CONSOLIDATION, THE GREATER THE POTENTIAL FOR THE SUBSEQUENT MOVE.
RISING PRICES AND A DECLINE IN OPEN INTEREST AT A RATE GREATER THAN THE SEASONAL NORM IS BEARISH. THIS MARKET CONDITION DEVELOPS BECAUSE SHORT COVERING AND NOT FUNDAMENTAL DEMAND IS FUELING THE RISING PRICE TREND. IN THESE CIRCUMSTANCES MONEY IS FLOWING OUT OF THE MARKET. CONSEQUENTLY, WHEN THE SHORT COVERING HAS RUN ITS COURSE, PRICES WILL DECLINE.
IF PRICES ARE DECLINING AND THE OPEN INTEREST RISES MORE THAN THE SEASONAL AVERAGE, THIS INDICATES THAT NEW SHORT POSITIONS ARE BEING OPENED. AS LONG AS THIS PROCESS CONTINUES IT IS A BEARISH FACTOR, BUT ONCE THE SHORTS BEGIN TO COVER IT TURNS BULLISH.
A DECLINE IN BOTH PRICE AND OPEN INTEREST INDICATES LIQUIDATION BY DISCOURAGED TRADERS WITH LONG POSITIONS. AS LONG AS THIS TREND CONTINUES, IT IS A BEARISH SIGN. ONCE OPEN INTEREST STABILIZES AT A LOW LEVEL, THE LIQUIDATION IS OVER AND PRICES ARE THEN IN A POSITION TO RALLY AGAIN.
LET'S SUMMARIZE THESE WITH AN EASY-TO-READ CHART:



SO, PRICE ACTION INCREASING IN AN UPTREND AND OPEN INTEREST ON THE RISE ARE INTERPRETED AS NEW MONEY COMING INTO THE MARKET (REFLECTING NEW BUYERS) AND IS CONSIDERED BULLISH. NOW, IF THE PRICE ACTION IS RISING AND THE OPEN INTEREST IS ON THE DECLINE, SHORT SELLERS COVERING THEIR POSITIONS ARE CAUSING THE RALLY. MONEY IS THEREFORE LEAVING THE MARKETPLACE AND IS CONSIDERED BEARISH.

IF PRICES ARE IN A DOWNTREND AND OPEN INTEREST IS ON THE RISE, CHARTISTS KNOW THAT NEW MONEY IS COMING INTO THE MARKET, SHOWING AGGRESSIVE NEW SHORT SELLING. THIS SCENARIO WILL PROVE OUT A CONTINUATION OF A DOWNTREND AND A BEARISH CONDITION. LASTLY, IF THE TOTAL OPEN INTEREST IS FALLING OFF AND PRICES ARE DECLINING, THE PRICE DECLINE IS BEING CAUSED BY DISGRUNTLED LONG POSITION HOLDERS BEING FORCED TO LIQUIDATE THEIR POSITIONS. TECHNICIANS VIEW THIS SCENARIO AS A STRONG POSITION TECHNICALLY BECAUSE THE DOWNTREND WILL END AS ALL THE SELLERS HAVE SOLD THEIR POSITIONS. THE FOLLOWING CHART THEREFORE EMERGES:




WHEN OPEN INTEREST IS HIGH AT A MARKET TOP AND THE PRICE FALLS OFF DRAMATICALLY, THIS SCENARIO SHOULD BE CONSIDERED BEARISH. IN OTHER TERMS, THIS MEANS THAT ALL OF THE LONG POSITION HOLDERS THAT BOUGHT NEAR THE TOP OF THE MARKET ARE NOW IN A LOSS POSITION, AND THEIR PANIC TO SELL KEEPS THE PRICE ACTION UNDER PRESSURE.

SAR

Late Mr W.D. Gann's Stop And Reverse Concept
Definition:


A stop and reverse (often known as SAR) is a type of stop loss order that exits the current trade, and either simultaneously or immediately afterwards, enters a new trade in the opposite direction. Stop and reverse orders combine elements of trade management and risk management, and are used in place of regular stop loss orders.

When Are Stop And Reverse Orders Used?


Stop and reverse orders are used when a trader wants to reverse their position (hence the name stop and reverse). For example, if a trader is in a long trade, and wants to exit the long trade and enter a short trade at the same price, they would use a stop and reverse order. The same task could be accomplished manually (i.e. placing an exit order, followed by an entry order), but stop and reverse orders are more efficient as they can combine the entry and exit into a single order.

How Do Stop And Reverse Orders Work?


Stop and reverse orders not a standard order type, and are not offered by many brokerages or any exchanges (that I am aware of). Therefore, stop and reverse orders are usually implemented by the trader's trading software (order entry software), and therefore their implmentation can vary significantly, but with the same end result (a new trade in the opposite direction).

If a trader's trading software does not offer stop and reverse orders (many do not), the trader can create a stop and reverse order by doubling the number of contracts (or shares, or lots, etc.) in their stop loss orders. For example, if a trader is in a long trade with one contract, a stop loss order that is placed for two contracts will function exactly like a stop and reverse order.

Note that stop and reverse orders are not related to the Parabolic SAR indicator, however, a trader that is trading using the Parabolic SAR indicator may use stop and reverse orders in their trading.

Also Known As: SAR


(courtesy: about.com)

Mr Gann calculated SAR from the previous two trading days data. If Downtrend, he would use the Highest High of previous two trading days as SAR, if Uptrend he would use previous two trading days' Lowest Low as SAR. I would use it in conjunction with the multiple band analysis, and the Normal Probabality Theory, that I had been using hitherto. I hope this refinement brings you and me profits unimaginable...and this is what trading is all about...isn't it?

OPEN INTEREST

Futures Open Interest
Interest is the total number of options and/or futures contracts that are not closed or delivered on a particular day.

Open interest is NOT the same thing as volume of options and futures trades.

Time Trading Activity Open Interest
Jan 1 A Buys 1 option and B sells 1 option contract 1
Jan 2 C Buys 5 options and D sells 5 options contracts 6
Jan 3 A sells his 1 options and D buys 1 option contracts 5
Jan 4 E buys 5 options from C who sells 5 options contracts 5



On Jan 1, A buys an option, which leaves an open interest and also creates trading volume of 1
On Jan 2, C and D create trading volume of 5 and there are also 5 more options left open
On Jan 3, A takes an offsetting position and therefore open interest is reduced by 1, and
trading volume is 1
On Jan 4, E simply replaces C and therefore open interest does not change, trading volume increases by 5.



Open interest, the total number of open contracts on a security, applies primarily to the futures market.
It is often used to confirm trends and trend reversals for futures and options contracts.


What Open Interest Tells Us
A contract has both a buyer and a seller, so the two market players combine to make one contract.
The open-interest position that is reported each day represents the increase or decrease in the number of contracts for that day, and it is shown as a positive or negative number.
An increase in open interest along with an increase in price is said to confirm an upward trend.
Similarly, an increase in open interest along with a decrease in price confirms a downward trend. An increase or decrease in prices while open interest remains flat or declining may indicate a possible trend reversal.


Rules of Open Interest
If prices are rising and open interest is increasing at a rate faster than its average, this is a bullish sign.
More participants are entering the market, involving additional buying, and any purchases are generally aggressive in nature.
If the open-interest numbers flatten following a rising trend in both price and open interest, take this as a warning sign of an impending top.
High open interest at market tops is a bearish signal if the price drop is sudden, since this will force many 'weak' longs to liquidate. Occasionally, such conditions set off a self-feeding downward spiral.
An unusually high or record open interest in a bull market is a danger signal. When a rising trend of open interest begins to reverse, expect a bear trend to get underway.
A breakout from a trading range will be much stronger if open interest rises during the consolidation. This is because many traders will be caught on the wrong side of the market when the breakout finally takes place. When the price moves out of the trading range, these traders are forced to abandon their positions. It is possible to take this rule one step further and say the greater the rise in open interest during the consolidation, the greater the potential for the subsequent move.
Rising prices and a decline in open interest at a rate greater than the seasonal norm is bearish. This market condition develops because short covering and not fundamental demand is fueling the rising price trend. In these circumstances money is flowing out of the market. Consequently, when the short covering has run its course, prices will decline.
If prices are declining and the open interest rises more than the seasonal average, this indicates that new short positions are being opened. As long as this process continues it is a bearish factor, but once the shorts begin to cover it turns bullish.
A decline in both price and open interest indicates liquidation by discouraged traders with long positions. As long as this trend continues, it is a bearish sign. Once open interest stabilizes at a low level, the liquidation is over and prices are then in a position to rally again.


If prices are rising and the volume and open interest are both up, the market is decidedly strong. If the prices are rising and the volume and open interest are both down, the market is weakening. Now, if prices are declining and the volume and open interest are up, the market is weak; but when prices are declining and the volume and open interest are down, the market is gaining strength.


Volume and Open Interest


Used in conjunction with open interest, volume represents the total number of shares or contracts that have changed hands in a one-day trading session in the commodities or options market.
The greater the amount of trading during a market session, the higher the trading volume. A new student to technical analysis can easily see 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.
Volume precedes price, which means that the loss of either 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.
The rules that have been set in stone for both volume and open interest are combined because of their similarity; however, having said that, there are always exceptions to the rule, and we should look at them.


Price Volume Open Interest Market
Rising Strong
Rising Weak
Declining Weak
Declining Strong



So, price action increasing in an uptrend and open interest on the rise are interpreted as new money coming into the market (reflecting new buyers) and is considered bullish.
Now, if the price action is rising and the open interest is on the decline, short sellers covering their positions are causing the rally. Money is therefore leaving the marketplace and is considered bearish.
If prices are in a downtrend and open interest is on the rise, chartists know that new money is coming into the market, showing aggressive new short selling. This scenario will prove out a continuation of a downtrend and a bearish condition.
Lastly, if the total open interest is falling off and prices are declining, the price decline is being caused by disgruntled long position holders being forced to liquidate their positions.
Technicians view this scenario as a strong position technically because the downtrend will end as all the sellers have sold their positions. The following chart therefore emerges:


Bullish An increasing open interest in a rising market
Bearish A declining open interest in a rising market
Bearish An increasing open interest in a falling market
Bullish A declining open interest in a falling market



DISCLAIMER:
Investments in stock markets are risky.
While you can earn excellent money, you can also loose a lot.
Information and advice is based on technical analysis and is provided without any liability
(financial or otherwise).

trading methods

Overbought:
A stock or commodity market condition where there has been significant trading bidding up prices to higher levels, levels which seem overextended

In technical analysis, it is a market in which the volume of buying that has occurred is greater than the fundamentals justify

A technical opinion that the market price has risen too steeply and too fast in relation to underlying fundamental factors

A technical condition that occurs when prices are considered too high and susceptible to a decline. Overbought conditions can be classified by analyzing the chart pattern or with indicators such as the Stochastic Oscillator and Relative Strength Index (RSI). A sharp advance from $15 to $30 in 2 weeks might lead a technician to believe that a security is overbought. Or, a security is sometimes considered overbought when the Stochastic Oscillator exceeds 80 and when the Relative Strength Index (RSI) exceeds 70. It is important to keep in mind that overbought is not necessarily the same as being bearish. It merely infers that the stock has risen too far too fast and might be due for a pullback.

A term used to describe a market or a stock that has appreciated so rapidly and has generated such excessively bullish sentiment that a near-term decline is highly likely

A physical asset or futures contract whose prices have been pushed up to a level that some believe is unrealistically high and cannot be sustained ie. when the speculative long interest has rapidly increased and the speculative short interest is sharply reduced




Oversold:

A term used to describe a technical opinion of a market has declined too steeply and too fast in relation to underlying fundamental factors

An analytical term for a stock that is underpriced

a condition of the marked after an abrupt recession. In this situation a correction rise is possible

A technical condition that occurs when prices are considered too low and ripe for a rally. Oversold conditions can be classified by analyzing the chart pattern or with indicators such as the Stochastic Oscillator and Relative Strength Index (RSI). A sharp decline from 30 to 15 in 2 weeks might lead a technician to believe that a security is oversold. Or, a security is sometimes considered oversold when the Stochastic Oscillator is less than 20 and when the Relative Strength Index (RSI) is less than 30. It is important to keep in mind that oversold is not necessarily the same as being bullish. It merely infers that the security has fallen too far too fast and may be due for a reaction rally.

The reverse of overbought. A single security or a market which, it is believed, has declined to an unreasonable level

A market which has fallen too far and too fast under excessive selling pressure and is expected to move back to a higher, more neutral level

Used in the context of general equities. Technically too low in price, and hence a technical correction is expected. Antithesis of overbought

A physical asset or futures contract whose prices have been pushed down to a level that some believe is unrealistically low and cannot be sustained ie. when the speculative long interest has been drastically diminished and the speculative short interest increases.

An equity (or market) that has gone down to which its valuation seems to support buying of the stock.



Swing Trading:

Opposite of daytrading. Swing Traders speculate longer term on prices of stocks, futures, etc.

This term is typically used to imply a style where one takes a position for several days to a few weeks. A swing trade might be completed in less than a week, or if the stock consolidates it might take several weeks. While a swing trader will watch the market very closely, this style does not require the trader to be in front a computer screen while the market is open. A swing trader will typically aim for a 10-15% profit on all trades.

Swing trading is commonly defined as a stock, index, or commodities trading practice whereby the instrument is bought or sold at or near the end of an up or down price swing caused by daily or weekly price volatility. A swing trade position is typically open longer than a day, but shorter than trend following trades or buy and hold investment strategies. Swing traders engage in prospecting changes in an instrument's price caused by oscillations between its price being bid up by optimism and alternatively being bid down by pessimism over a period of a few days, weeks, or months. Profits can be sought by engaging in either Long or Short trading

Identifying whether a market is currently trending higher or lower, or trading sideways and when this will change is a challenge for many swing trading and long-term trend following trading strategies

Swing traders do not need perfect timing - to buy at the bottom, and sell at the top of price oscillations. Small consistent earnings that involve strict money management rules can compound returns significantly.

Most important is to understand that there is no foolproof mathematical model or algorithm that will always work so only use them as research tools not decision making engines.

bse etf

BSE Codes Equity ETF’s
Equity ETFs
8 Benchmark Nifty BeES NIFTYBEES 590103
9 Benchmark Junior Nifty BeES JUNIORBEES 590104
10 Benchmark Bank BeES BANKBEES 590106
11 Benchmark Benchmark Mutual Fund – PSU Bank Benchmark ETF PSUBNKBEES 590108
12 Benchmark Benchmark Mutual Fund – Shariah Benchmark ETF SHARIABEES 590109
13 ICICI Prudential SENSEX Prudential ICICI ETF SPIcE(Sensex-ETF) 555555
14 Kotak Kotak Mahindra Mutual Fund – Kotak PSU Bank ETF KOTAK PSU BK 590107
15 Kotak Kotak Mahindra Mutual Fund – Kotak Sensex ETF Kotak Sensex –ETF 532985
16 Quantum Quantum Index Fund -ETF QUANTUM INDX 590110
17 Reliance Reliance Mutual Fund -Banking ETF REL BANK ETF 590105
18 UTI S&P CNX NIFTY UTI NOTIONAL DEPOSITORY RECIEPTS SCHEME (SUNDER) UTISUNDERETF 590102