Thread by @ArjunB9591

𝗧𝗿𝗮𝗱𝗶𝗻𝗴 𝗥𝘂𝗹𝗲𝘀 𝗨𝘀𝗶𝗻𝗴 𝗢𝗽𝗲𝗻 𝗜𝗻𝘁𝗲𝗿𝗲𝘀𝘁

1. When open interest rises during a rally, it confirms the uptrend and gives a green
light to add to long positions. It shows that more short sellers are coming into the
market.

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When they bail out, their short covering is likely to push the rally higher. When open interest rises as prices fall, it shows that bottom pickers are active in the market.

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It gives a green light to shorting because those bargain hunters are likely to push prices lower when they throw in the towel
If open interest rises when prices are in a trading range, it’s a bearish sign. Commercial hedgers are much more likely to sell short than speculators
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A sharp increase in open interest while prices are flat shows that savvy hedgers are probably shorting the market. You want to avoid trading against those who likely have better information than you.

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2. If open interest falls while prices are in a trading range, it identifies short covering by major commercial interests and gives a buy signal. When commercials
start covering shorts, they show that they expect the market to rise.

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When open interest falls during a rally, it shows that winners and losers alike are becoming cautious. Longs are taking profits, and shorts are covering. Markets discount the future, and a trend that is accepted by the majority is ready to reverse.

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If open interest falls during a rally, consider selling and getting out.
When open interest falls during a decline, it shows that shorts are covering and buyers are taking losses and bailing out. If open interest falls while prices
slide, take profits on short positions.

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3. When open interest goes flat during a rally, it shows that the uptrend is getting old and the best gains have already been made. This gives you a signal to tighten stops on long positions and avoid new buying.

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When open interest goes flat dur-
ing a decline, it warns you that the downtrend is mature and it is best to tighten stops on short positions. Flat open interest in a trading range does not contribute any new information.

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𝗦𝗼𝗺𝗲 𝗠𝗼𝗿𝗲 𝗜𝗻𝗳𝗼 𝗼𝗻 𝗢𝗽𝗲𝗻 𝗜𝗻𝘁𝗲𝗿𝗲𝘀𝘁

The higher the open interest, the more active the market, and the less slippage you risk when getting in and out of positions.

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Short-term traders should focus on the contracts with the highest open interest. In the futures markets, the highest open interest tends to be in the front months.

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As the first notice day approaches and open interest of the front month begins to drop, while open interest in the next month begins to rise, it signals to roll over your position into the next month.

The End

Source - The New Trading for a living by Dr Alexander Elder