Choose your Trade with Open Interest
When considering whether to trade long or short based on Open Interest (OI), here are a few things to keep in mind:
Increasing Open Interest + Rising Prices: If OI is increasing along with rising prices, it suggests that new money is flowing into the market, indicating bullish sentiment. This could be a good time to consider taking a long position.
Increasing Open Interest + Falling Prices: Conversely, if OI is increasing but prices are falling, it suggests that there may be a bearish sentiment in the market. This could be a good time to consider taking a short position.
Also, when you start to see the price range/trade sideways after a large pump or dump, consider the following:
Decreasing Open Interest: If OI is decreasing, it may suggest that traders are closing their positions, indicating a lack of conviction in the market. This may be a sign to stay on the sidelines until there is a clearer direction or to close any open trades that have followed the recent trend (take profits!).
Open Interest can be a useful tool in determining Market Sentiment and Direction, but it should be used in conjunction with other technical analysis to make trading decisions.