In the world of commodity trading, it is essential to seek as many available indicators as possible when choosing investments. A deep dive into the markets means you should exercise discipline and hard work. This hard work can pay off when you can match the pieces of the complex puzzle.
What is trading volume?
Trading volume is the total number of futures contracts traded in the market. The higher the trading volume, the more active the futures contract or commodity is. Technical analysts use trading volume as a tool to confirm price direction. When the market starts to rise or fall in price, the analyst will not waste time watching trading volume during the price movement.
High trading volume often confirms a strong move in a bull market when prices are rising. Conversely, high trading volume with falling prices will confirm a strong bearish market move.
Experts also use trading volume as a tool to detect trend reversals. When declining trading volume comes with rising or falling prices, the analyst will often conclude that the market is losing momentum in some way. It then becomes time to look for a correction point – usually support or resistance – where prices will reverse from the current trend.
Trading volume data can be found for free in many charting packages. It can be displayed for commodities as well as other assets traded in futures markets.
What is open interest?
Open interest is the total number of open long and short positions that have not yet been closed in the futures contracts of a particular commodity. While trading volume counts every contract traded, open interest only counts those contracts that still hold open market risk. This is a key tool when it comes to understanding what investors are thinking and doing at certain times.
Increasing open interest indicates strength in the move. If the market is moving up or down and increasing open interest accompanies this move, it often confirms the direction of the move and that the price will continue to go in the same direction. Low open interest may mean that the market is entering a less active trading period as market participants are not opening new positions and are closing those they have.
Commodity exchanges such as the Chicago Mercantile Exchange (CME) and the Intercontinental Exchange (ICE) publish trading volume and open interest data daily. In some cases, this is done in real-time.
The Commodity Futures Trading Commission (CFTC) publishes data called “Commitments of Traders” every Friday of each week. This report details open interest according to specific categories of traders. It also shows whether they hold long or short positions. The report lists positions held by producers, traders, processors, users, swap dealers, and those managing money as well as other reportable and non-reportable positions. This detailing of open interest can be very useful when it comes to knowing who is doing what in a specific futures contract.
Using both trading volume and open interest as part of your overall market view will help you become a better trader or investor. Trading volume and open interest are vital pieces when it comes to solving the puzzle of the markets and forming a wise and informed opinion on rising or falling prices.
Source: https://www.thebalancemoney.com/volume-open-interest-808994
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