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Intraday trading is a popularly practiced style of investment. Traders from different backgrounds practice intraday trading on each trading day as most traders look to grab the opportunity to earn in the slight movement. One must also be aware of open interest (OI) in the stock market as an intraday trader.
Intraday trading is one of the major choices of many professional traders in the stock market. Smart traders in the stock market capitalise on market volatility to identify opportunities and execute trades. Many traders carry out intraday trading activity on the basis of different plans and indicators. While trading in futures and options, it is crucial to learn and use the data provided by ratios such as the open interest. By understanding the open interest concept, traders can make correct intraday trading decisions. In this article, let’s learn about how to use open-interest intraday trading.
Defining Open Interest
Open interest refers to the total number of outstanding contracts which are currently held in the market. Open interest is a measurement that tells a trader about the level of activity in the market. It increases by a single contract when there is a buy or sell by the participant.
When a buyer or seller follows their position to a new buyer or seller, there is no change in the open interest ratio. With the flow of money and trade, the open interest in stocks will increase, and when there is a greater outflow of cash, the open interest seems to fall. Therefore, the open interest displays the change in stock price.
To understand what is open interest in the share market, one needs to study volume, which is the next section of this article.
Meaning of Volume
A volume has different parameters. Volume determines the number of contracts that are transacted between the buyer and seller. It doesn’t represent whether it’s a new contract or an existing contract that has been transacted. In short, the basic difference between an OI and volume is that an OI represents the number of contracts that are open and live, while on the other hand, volume indicates how many contracts have been executed.
Use of Open Interest In Trading
When the stock price rises, the parameter of open interest in the stock also rises, which tells traders there is an infusion of money in the market. That can also tell traders that there will be a bullish trend in the stock market. When the stock price is rising, and the open interest is falling, there are chances that traders are exiting the trade. In such cases, the bearish trend can be at the door of the market.
When the stock price is falling along with the open interest on the downside, then this indicates that the trader is under pressure to close their position. This trend suggests that the selling of the stock may soon end. It tells us there will be a bearish trend.
Interpreting Volume and Price Together
Price action, in trading terms, is how the price of a security moves over a time interval. It refers to the upward or downward trend of a particular financial asset.
Traders can use volume in association with the OI and price to analyse market conditions. The common rule says that if the price of a stock is rising and the volume and OI are up, then the market will be in a strong position. In the second scenario, when the price is rising, and the other two parameters are going down, it can be a sign of a weak market.
Conclusion
Open interest data can help an intraday trader identify the market’s condition before taking an entry in their trade. With the data on volume and price action, one can get more in-depth knowledge about the stock trend. After one identifies the direction in which the market is going, one can make the following changes. One can check the open interest on the Share India platform. To learn more about intraday trading and investing, join the Share India clan of smart traders.