Open Interest
Open Interest is a very informative metric. In fact, it is so useful that in the traditional stock market it is hard to find and is usually available only on a day to day basis. We are fortunate, that in the world of crypto, exchanges provide this information at a much granular basis (minutes or seconds).
What is it?
Definition
Open Interest (OI) is the contracts (or positions) open (or outstanding) in the market. In other words, if OI is 500 million, then there are $500 million longs and $500 million shorts currently in a position.
Concept
OI can increase, remain unchanged (stay flat), or decrease.
An increase in OI means longs and shorts are entering. For example, if OI increases from $500 million to $505 million, then OI Delta is +5million which means $5 million longs and $5 million shorts entered.
A decrease in OI means longs and shorts are exiting For example, if OI decrease from $500 million to $490 million, then OI Delta is -10million which means $10 million longs and $10 millions shorts exited.
OI can also remain unchanged. For example, if OI is $500 million at 5:05 UTC and remains $500 million at 6:05 UTC, this means no new contracts are entering or exiting during the hour. Essentially, there was a transfer of contracts (instead of new contracts open). A transfer of contracts would be something like one trader opens a long, while the other side closes a long.
Example
Here is another (detailed) way of looking at it.
Suppose there are 3 traders currently in the market: Alice, Joe, and Bob. Let’s also assume that 1 contract = $1 (which is usually the case on the majority of crypto-exchanges).
Alice is in 10 short contracts (so she has a $10 short position). Joe is holding 3 long contracts and Bob is holding 7 long contracts. This means there are currently 10 short contracts and 10 long contracts in the market. The Open Interest is therefore 10.
Now let’s say a new participant, Zane, wants to enter the market. Zane is interested in opening a long position of 5 contracts. Bob is also now looking to exit out of 5 contracts (out of his 7). So Bob transfers his 5 long contracts to Zane (we will get into how this is done soon). This transaction results in no net new contracts, just a transfer of contracts. Hence, there is no new open interest, and the open interest remains at 10.
At this point here is the breakdown of everyone's position:
Alice is still holding 10 short contracts.
Bob is now holding 2 long contracts (reduced his position from 7 to 2).
Joe is still holding 3 long contracts Zane is holding 5 long contracts.
Remember, the number of long contracts must equal the number of short contracts. We have 10 short contracts and 10 long contracts in the market (OI = 10).
Now let’s say Alice wants to exit out of 3 of her short contracts. Joe is also looking to exit out of 3 long contracts and takes the other side of Alice's position (will explain soon how this is executed). There are now 3 less contracts in the market so open interest has reduced by 3. This increase/decrease in OI is known as OI Delta and the total Open Interest is now 7.
The positions now change to:
Alice is holding 7 short contracts.
Bob is holding 2 long contacts.
Joe is holding 0 long contracts (and is no longer a participant in the market).
Zane is holding 5 long contracts
Finally, Zane wants to double down on his position and is interested in entering 5 more long positions. Alice also wants to enter 5 more short contracts and matches the other side of Zane’s position. Since 5 new contracts are now in the market, OI delta is +5 and the total OI is now 12.
This concludes our example and shows how OI stays flat (unchanged), increases and decreases.
Why it's important?
Now let’s come back to the crypto markets and understand these transactions via market / limit orders.
There are essentially two types of transactions in the market: Market buy which matches up with a limit sell. Market sell which matches up with a limit buy.
Let’s quickly make something clear – buys and sells are not the same thing as longs and shorts. It is a common mistake to assume buying = longs, and selling = shorts. Now let’s breakdown how a long can enter/exit the market and how a short can enter/exit the market.
To enter a long contract one must execute a buy order (either market or limit buy). To exit a long contract one must execute a sell order (either market or limit sell). To enter a short contract one must execute a sell order (either market or limit sell). To exit a short contract one must execute a buy order (either market or limit buy).
This means each individual trade can be broken into 8 different types of transactions.
How can it be used?
Volatility
Open Interest (OI) can often be used as a way to gauge volatility, especially when combining with price action.
On smaller timeframes, we often see that high volatility is accompanied with OI decrease. Why would it decrease? Traders usually do not have time to enter positions as price quickly moves up or down quickly (high volatility), while stops, liquidations, and take profits are automatically triggered, leading to net exiting of positions.
Low volatility is usually when OI increases as more and more people try to pick the right side of the next big move. In addition, most traders wait for price to reach new levels (support /resistance) to take profits, so a period of low volatility may not be enough reason to exit a position.
For example, let’s say price is consolidating / ranging, and open interest continues increasing. This means more and more participants are taking long and short positions and the amount of potential stop losses and potential liquidations is also increasing. When price does move and breakout of the range, we see increased volatility as one side of that open interest has their stops and liquidations triggered leading to a liquidity cascade.
On the other hand, if OI remains flat or decreases during consolidation, then we may not expect major market volatility (just a continued market volatility). Price may not be ready to “breakout” and the likelihood of a “fake-out” increases. This is when price moves outside of a range, but then quickly moves back inside. The theory behind this is since not a lot of new traders have entered during the range, there is not enough stop loss (SL) + liquidations (liq) to create a cascade event. This concept is what can create higher lows (HLs) or lowers highs (LHs) etc. in market structure as there isn’t enough SL+liq potential to push it to the next low (or high).
Support Resistance (S/R)
Open Interest can at times be used as a way to gauge where we have true support and resistance. We can look at the change in OI, known as OI Delta, to identify which candles have the highest increase in positions. In other words, a large positive OI delta lets us know where a lot of positions have opened. These levels can be psychological levels, where if price returns to the level, it forces traders to exit at break even.
Trapped Traders
Open Interest can also be used to identify trapped traders. Let’s say price is consolidating and OI is slowly increasing. This means during the range, both longs and shorts are entering, equally. When price does breakout (in either direction), one side of those traders are trapped (either longs or shorts). We can then know not only the price levels that they are trapped at but also can keep an eye on OI to see when a large number of positions have exited (a drop in OI). Often times we see price almost approach the breakeven price of these trapped traders but not enough, keeping them trapped. These trapped traders can often lead to additional fuel to create a trend and further push price up.
Trend reversal (OI drop)
On very low timeframes (like 1minute), we often see a sharp price movement + OI drop lead to a reversal. Of course, this is not always the case, so one should not trade just off this, instead it is more important to understand the concept/theory behind what may be happening. As per the above section, as long as one side of the traders remain trapped, it can create fuel for price to continue moving in that same direction (trend). Until finally, there is enough pain that those trapped traders exit, leading to a drop in OI. When this happens, there may not be enough interest or trapped traders (“fuel”) to continue the trend. Advanced users can identify the initial OI build up with the drop in OI to gauge what would considered a large drop in OI.
Identifying Stop Losses
We know that increasing OI means traders are opening positions (on both sides). As more and more positions enter – so do their stop losses. Coupling this information with price action, one can often estimate where large stop losses may lie. Usually retail put their stop losses under key levels. These key levels could be local lows, major support resistance levels, or even psychological levels (like 40000, 41000, 42000 etc.). If we know where OI is increasing, we can then get an idea of where the stops would be as well (on both sides).
Open Interest Profile
The OI Profile is one our unique products that maps open interest by price level. We won’t go into this too much here but feel free to read up on OI profile. It is quite a powerful tool as it essentially takes OI data and maps it with specific price levels (rather than time), allowing users to quickly find price levels exactly where positions have been opening (or closing).
Combining with Other Indicators
OI is a powerful because it can help decode the market especially when combining with other indicators. For example, combining volume with open interest.
Volume tells us the amount of market buys and market sells. However, we do not know whether these positions were entering or exiting. Open Interest tells us just that.
So suppose volume is 1million and OI delta is 1million. This means that 100% of the volume is entering positions (both longs and shorts).
Now let's say volume is 1million and OI delta is -1million. This tells us that 100% of the volume is exiting positions (both longs and shorts).
Finally, let's say volume is 1million and OI delta is 0. This tells us that either there was 0 net new contracts opened or closed (mostly a transfer of contracts). Sometimes this can be a quick way to look for absorption as one side could be absorbing the other (longs exit via market sell and on the other side of this we see absorption via longs entering on limit buys).
OI can be used with many different indicators (liquidations, CVD, funding rate etc.) to really decipher what the market activity is and is quite a powerful tool for finding confluence.
Where can I find this?
Open Interest and Open Interest Delta can be found across a multitude of our products.
Main (tradingview) Charts
On the main (tradingview) charts, users can go to Indicators → orderflow and open interest → choose from 4 different open interest indicators. These 4 indicators are Open Interest, Open Interest Delta, Open Interest (aggregated), Open Interest Delta (aggregated). Aggregated means users can take the sum of OI (or OI Delta) across most of the major exchanges.
Other Products
Open Interest data is also displayed on some of our other products: net positions heatmap, open interest profile, probability histogram, and coin screener.
Below images show how to access this data on each of our tools. To access our other products, go to products (in header section) --> then click one of the products (in image below, we show how to access the OI profile).
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