How to Use Open Interest for Intraday Trading | Motilal Oswal
How to Use Open Interest for Intraday Trading | Motilal Oswal

How to Use Open Interest for Intraday Trading

Intraday trading is one of the most exciting strategies that you can employ to generate profits from the price movements of assets. That said, it is also slightly riskier. This is due to the fact that in intraday trading, you buy and sell the asset within the same day and if the market doesn’t move your way, you can end up with significant losses. 

That’s why it is necessary to use strategies that can accurately predict the price movement of assets when partaking in intraday trading. This way, you can minimize the chances of the market moving in ways that you don’t expect. And one such popular method that traders use is the open interest strategy for intraday trading. 

The intraday open interest can give you a lot of helpful information with regards to the market sentiment, which is a good indicator of future price movement. But before we take a look at how you can use intraday open interest, let’s first take a quick look at what it is. 

  • What is open interest

Open interest has to do with derivative contracts like futures and options. It basically is the total number of outstanding open contracts at the end of a trading day. Now, when a fresh position is initiated, the open interest goes up. And when the position is closed, the open interest goes down. This is how the open interest calculation is made. 

And so, if the open interest for an asset goes up, it effectively means that more investors are buying into the asset. Similarly, if the open interest goes down, it means that the investors are closing out their positions and that the price trend is likely to change. Therefore, by simply monitoring the open interest and the various changes in it, you can to a certain extent predict the price trend shifts.  

  • How to use an open interest strategy for intraday trading? 

Now, although open interest on its own is powerful, many traders tend to use it along with the trading volume and price action metrics of an asset to get more accurate predictions. Here’s how you can use these three metrics for intraday trading.

1. If there’s an increase in the open interest along with an increase in price, the market is considered to be bullish. 

2. If there’s a decrease in the open interest along with an increase in price, the market is bullish, but it may soon be turning bearish. 

3. If there’s an increase in the open interest along with a sharp decrease in the price, the market is considered to be bearish with investors likely in a panic selling mode. 

4. If there’s a decrease in the open interest along with a decrease in the price, the market is considered to be bearish.

Conclusion

As you can see, the open interest data along with data on volume and price action can help you identify the market trend. Once you’ve identified the trend, all that’s remaining for you to do is initiate an appropriate position. If you’re interested in getting to know the open interest for an asset, you could always use an open interest calculator for the same. You can find such a calculator online for free.  

Related Articles: How to Open a Demat Account Without a Broker | Factors to Keep in Mind While Opening a Demat account | Factors to Consider When Opening a Demat Account | 10 Points to Remember When Operating your Demat Account | Types Of Demat Account & Trading Account

Ready to invest with us?

Share your Mobile Number with us and get started

  • +91|
scrollToTop