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Difference Between Open Interest And Volume
Open Interest and Volume are two commonly followed technical metrics in the stock & derivatives market. The prime difference between them is that volume measures contracts of the underlying asset traded at a time. On the other hand, open interest describes the number of outstanding positions currently held by speculators. Often traders consider open interest as cash that flows into the market and volume as a metric that gives an idea about the trading frequency.
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Comparative Table - Open Interest vs Volume
| Section | Open Interest | Volume |
|---|---|---|
| Definition | Number of active or outstanding futures and options contracts | Number of shares or contracts that are traded between market participants |
| Signifies | The measure of money flowing into and out of the market | The measure of trading interest in security among market players |
| Purpose | This shows the interest speculators have in a particular contract | Shows the number of times particular security has exchanged hands |
| Used by | Speculators in Futures and options contracts of an asset | Traders in any asset or security |
| Can be Used to Interpret | Signal reversals or breakouts in a trend | Confirm the sustenance or the exhaustion of a trend |
What is Open Interest?
Open interest is a measure of market activities or participation. It is defined as the number of active futures and options contracts of any asset the traders and investors hold on an asset, any particular day.
An open interest scales up by one contract if a new buyer and seller are willing to initiate a trade. If both of them are closing up on a trade, open interests scale down by one. Open interest is computed by adding all the positions held by market participants and subtracting them when they are closed or settled. Since this is a metric that quantifies the actively held contracts, the numerical value keeps changing every day with the addition and closure of new positions. An increase in open interest signals that the current market trend will continue to prevail, while a decline in the open interests suggests an end to the current price trend.
What is Volume?
Volume of trade is defined as the sum of transactions on an underlying security that have been completed in a given time frame. Unlike open interest, which shows only the number of actively traded contracts, the volume shows every trade with opened or settled contracts in a time interval. In addition, the volume denotes the level of activity in the market. Thus an actively traded stock market represents a higher volume while a passively traded market represents a lower volume. When studied with the rise in prices, volumes can also measure the strength of the market.
Volumes are usually the closest proxy to the liquidity of a traded security. If there is more interest among market participants for a particular security or derivative, it would naturally lead to more trades and better price discovery. Hence a greater volume indicates larger liquidity. It makes the market more efficient and allows a trade exit to be far less of a hassle since there is always a buyer or a seller for the security. Stock exchanges regularly publish the volume information so that traders can get an idea about the number of shares that are in motion. Many news websites, online trading platforms, and mobile applications also make the data accessible to the common traders. Trade volume graphs can vary depending on the time period one looks into.
Chart
Traders may consider looking at the following Bitcoin/Tether price chart to understand the concepts of volume and open interest better.
In the above chart, the horizontal histogram represents the volume traded at certain price levels. That said, one can find the open interest is represented by the candlesticks below the volume. This indicator shows that market participants held more than 105k future contracts on March 1, 2023, after trading ended.
For more such charts that can help develop a better understanding of concepts like open interest and trading volume, people can consider visiting TradingView.
Similarities
Analysts and traders usually use open interest and volume in tandem or individually to check the strength of a moving trend. For example, let's say that the prices rise along with an increase in open interest and volume. This usually signifies that the trend is strong and is likely to sustain its forward movement. Moreover, it implies potential trading opportunities. It tells that traders not only have an interest in a certain contract but would also back it up with their money.
But, if the prices are on an upward trend but volumes and open interest are not, it weakens the movement. It may hint at a future price consolidation or stagnation until a breakout happens.
The volume value is reset to zero at the start of every other day. But the open interest always remains higher than the volume. Therefore, when the volume is higher than open interests, it indicates a very high level of trading that day.
For professional-grade stock and crypto charts, we recommend TradingView – one of the most trusted platforms among traders.
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