Strength Indicators Volume & Open Interest Commodity Futures Chart

UNDERSTANDING VOLUME and OPEN INTEREST

Commodity Futures Market strength describes the intensity of market opinion with reference to a price by examining the market positions taken by various market participants. Volume or open interest are the basic ingredients of this indicator. Their signals are coincident or leading the market.

:::::>Volume
Volume shows the total number of contracts traded (either bought or sold, but not both) during a specified period of time (a day, a week, etc.) for all the contract months of a commodity. Volume is used to validate the signals generated from charts or technical indicators. Heavy volume tends to validate signals more than light volume. (The assumption is that greater market participation/activity leads to a more accurate reflection of sentiment strength.)Volume also shows the intensity of changes and the health of existing trends.

Technicians believe that volume precedes price, meaning that the loss of upside price pressure in a uptrend or downside pressure in a downtrend will show up in the volume figures before presenting itself as a reversal in trend on the bar chart.

market volume

 

:::::>Open interest
Open interest shows the number of contracts that have been created (positions that have been opened), but not yet offset (closed) by delivery, a liquidating transaction or option exercise. For each outstanding contract, one person is long and one person is short that contract. It is also used to measure activity and strength. An increase in OI and an increase in prices shows strength and confirms upward move, while a decrease in OI and an increase in prices shows weakness and suggests the end of a move. Note that as contracts approach delivery (contract expiration), open interest drops as more and more participants offset (close) their positions. This usually occurs with an increase in trading volume.

Increasing open interest means new money is flowing into the marketplace. The result will be that the present trend (up, down or sideways) will continue. Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. If, after a price trend with increasing open interest, the open interest levels off, it is often an early warning of the end to the trend.

Volume & Open Interest on a Price Chart

Price Volume Open Interest Interpretation
Rising Rising Rising Market is Strong
Rising Falling Falling Market is Weakening
Falling Rising Rising Market is Weak
Falling Falling Falling Market is Strengthening

Volume & Open Interest on a Price Chart

Price

Volume

OI

Interpretation

strong bullish

 -

strong bearish

 -

 -

 -

bearish liquidating

 -

 -

bearish short covering

 ?

 ?

storing energy for breakout

 ?

 ?

 -

possible direction change

 

In addition to pure volume and open interest studies, there are a few market strength indicators which also incorporate price into their calculations:

:::::>Ease of Movement
Ease of Movement creates one value for both the price and volume of a period.
EMV=(((today's high today's low)/2)-((yesterday's high yesterdays low)/2))/(volume(in 10,000)/high-low)

EMV data is plotted around zero. When EMV crosses above zero and prices move upward easily, then it's a buy signal. When EMV crosses below zero and prices move downward easily, then it's a sell signal. When price movement is small on heavy volume, the ease of movement indicator is usually at zero.

:::::>On Balance Volume
On Balance Volume adds the day's volume to a cumulative total when prices closes up, and subtracts the day's volume when prices close down. Changes in OBV usually precede changes in price. Divergences, When OBV is decreasing while the price is increasing, a signal is generated that the rally may not be as solid as it appears. When price is declining and OBV is increasing, it is a sign that the investor shouldn't become too bearish. The decline may not last too long.

:::::>Price Volume Trend
Price Volume Trend, similar to OBV, adds or subtracts a portion of a day's volume to the cumulative total depending on the size of the price increase or decrease.

:::::>Volume Oscillator
Volume Oscillator is created by taking the difference between two moving averages of a commodity's volume. To interpret, use the same methods as for MA crossovers of price data.

:::::>Volume Rate of Change
Volume Rate-Of-Change is created by dividing the volume change over x-periods by volume x-periods ago.

 

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