How to understand the market through changes in trading volume and open interest

Trading volume refers to the number of transactions or contracts between buyers and sellers of a listed product in the market. It is a common technical analysis indicator for spot and contract markets.

Open interest refers to the number of open contracts between buyers and sellers of a listed product in the market. It is a technical analysis indicator unique to the futures market.

There are four combinations of the two:

Trading volume gradually increases, and open interest increases simultaneously

This situation is the most common. The bulls and bears have serious differences in their views on the future market, and the price fluctuations are rapid and frequent. At this time, the expansion of trading volume is caused by the active entry and exit of short-term funds, while the expansion of open interest shows the accumulation of long and short energy.

Trading volume gradually decreases, and open interest gradually increases

This situation is often a precursor to the arrival of a big market. At this time, the joint action of the bulls and bears and external market factors has enabled the market to reach a balance in dynamics. The reduction in trading volume is due to the gradual balance of the price fluctuation range, which makes short-term funds unprofitable; but the increase in open interest means that the differences in views between the bulls and bears have increased, and the capital confrontation has gradually escalated.

This situation indicates that the subsequent trend is very fierce. Once it breaks out, at least an intermediate market will appear.

The trading volume gradually increases, and the position gradually decreases

This situation generally occurs in the relay process of a market. The rapid fluctuation of the price provides a good opportunity for short-term speculation, so short-term funds actively intervene, resulting in an increase in trading volume; because the market is favorable to one of the long and short parties, the opponents flee one after another, and the position gradually decreases

The trading volume gradually decreases, and the position gradually decreases

This situation often occurs at the end of a wave of market. The simultaneous contraction of trading volume and position volume indicates that both the long and short parties or one of them has lost confidence in the future market, and funds are gradually withdrawing

In short, trading volume is the basic driving force for the development of the market. When trading volume increases, price changes tend to be active, and when trading volume decreases, price changes tend to be moderate; position volume is the internal driving force for the development of the market. Increasing positions is the beginning of a market, and reducing positions is the end of a market.

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