For those who operate in futures markets, there are 2 sentiment indicators that you MUST monitor:

Open Interest (OI) and Long/Short Ratio (LSR)

Open Interest:

This is the total number of derivative contracts (such as futures) that are open and active in the market, that is, that have not yet been settled. It indicates the level of participation and interest of traders in an asset.

• Increase in OI: Sign of greater activity and interest.

• Decrease in OI: Indicates that contracts are being closed, suggesting less participation.

It is important to note that we cannot know whether these are Long or Short contracts; only the Exchange knows this.

Long/Short Ratio:

Measures the proportion of long positions in relation to short positions in a given asset.

• LSR greater than 1: More traders betting on the asset's rise.

• LSR less than 1: More traders betting on the asset's fall.

Example: If the LSR is 3, it means that there are 3 long positions for every 1 short position. And if the LSR is 0.6, it means that there are 0.6 long positions for every 1 short position, that is, the number of shorts is greater. For each short, there is less than one long position. The LSR of the same asset can vary from one exchange to another, which is why many use the aggregate indicator, which obtains information from several brokers.

Now, here is the cherry on the cake:

There is a “well-known” divergence in the market. As I mentioned above, you do not know whether the contracts being opened or closed are long or short, however, if you combine the OI with the LSR, you can interpret what may be happening. To do this, keep the OI above the LSR on the chart, and wait for a kind of alligator mouth to form. You can easily check the OI and LSR on CoinGlass.

(Continued in the next post!)