Open Interest Profile
Displays trading activity including combinations of open interest and volume per price levels.
Background
Open Interest (OI) Profile takes the total positions (longs and shorts) opened at a specific price level during the specified time period and then makes that information easily visible to the trader. Conceptually, open interest profile is similar to volume profile.
What is the main difference between volume and open interest? Volume shows the sum of market buys and market sells in the specified time period. Market buys can be longs entering or shorts closing and market sells can be shorts entering or longs exiting. Open Interest shows where positions are opening and closing which is not equivalent to market buys and market sells. This is a key concept as it is imperative to understanding why open interest is powerful.
Open Interest Profile can be used similarly to volume profile and at times can provide a much larger edge. Volume Profile shows price points where people are buying and selling, not where people are opening longs or shorts. For example, volume profile may show a high volume node (price level at which a lot of volume occurred), where most of the volume was actually traders closing their positions. Implying that market buys and market sells were used to exit their positions. A high volume node (hvn) formed out of volume that was through positions exiting may not act as true support/resistance as there are no longer any trades open at that price point. On the other hand, An HVN where most of the volume is traders opening positions will likely behave differently. OI Profile identifies where positions have opened or closed historically rather than showing where market buying and market selling occurred.
OI Profile can be used in almost all the same methods and techniques as volume profile and more as this is a completely novel concept and rarely used by most traders.
Tool Overview
Users can choose from multiple inputs to generate the profiles: symbol, lookback period, display on graph 1, graph 2, and graph 3.
Exchange and Coins supported:
Bitmex: XBTUSD and ETHUSD
Coming soon: Binance [all 80+ binance futures usdt perpetual]
Lookback period is how far back to generate the profile from. For example, if the lookback period is 30d that means use the last 30 days of open interest to create the profile. There are currently 5 lookback periods offered: 1day, 7day, 30day, 90day, and maximum available.
In the image above, the three profile displayed are: OI Profile [open positions only] (graph 1), Open Interest Profile (graph 2) and Volume Profile (graph 3). The black dashed horizontal line represents the most recent price. All profile are generated from data displayed from the lookback period selected, which in this example is over the last day (last 24 hours).
The profiles currently offered are:
Open Positions: This is Open Interest Profile filtered on only when open interest increases (positions opening). In some cases it can be useful to only focus on where positions have opened and ignoring where positions have closed.
Open Interest (OI) Profile: Includes both positions that have opened and closed.
Buys & Sells Profile: Similar to volume profile, but displays the market buys and market sells separately.
Buys & Sells Profile [OI overlay]: For advanced users, we separate the bars in buys and sells profile by different colors that represent whether OI increased or decreased at that price level. This can show whether large amounts of market buys and market sells were also linked with a net increase in positions versus a net decrease in positions.
Volume Profile: The total volume at each price level. Volume is defined as the sum of market buys and market sells.
Volume Profile [overlay OI delta]: For advanced users, we separate the bars in volume profile by different colors that represent whether OI increased or decreased at that price level. This can show which high volume bars were also linked with a net increase in positions versus a net decrease in positions.
How do traders use this?
Profiles are in general a powerful and useful tool for determining important price levels. There are a myriad of different ways to use volume profile. A common strategy used by traders is to identify where high volume nodes are and then wait for price to break above or below those nodes. Often, the areas between these high volume nodes that have little volume act as a liquidity gap and can act as magnetic zones.
However, volume profile is limited as it only measures the volume at particular price levels – not whether positions are opening or closing at a particular price level. Open Interest Profiles can provide additional information as to where traders are entering or exiting positions.
By combining open interest with volume profile, we can really dig into the specifics of what traders are doing. In the image below, three graphs are displayed side by side: Volume profile [overlay oi delta], Volume Profile, and Volume Profile [buys and sells] where we have identified 5 nodes (A,B,C,D and E) and how to interpret them.
A --> There is a lot of volume that occurred at this price level according to the middle graph, Volume Profile. Most traders use just this information. However, we can look even further into the volume profile separated by buys and sells. The majority of volume came from sell volume (market sells). Finally, the icing on the cake is to combine this with Open Interest, in this case by overlaying the change in open interest on the volume profile. A net positive change in open interest is light green, while a net negative change in open interest is light red. We can see that the volume was due to mostly positions closing.
B --> Similar to A, there was a lot of volume transacted at this price level [around 40M+], of which most was through market selling and positions closing. Market sell orders can be used to enter a short or exit a long. Since the majority of volume was positions exiting through market selling, one can estimate to some degree of certainty that the majority of this volume was due to traders exiting longs.
C --> Unlike A and B, this high level of volume is mostly through market buy orders. The net Open Interest at this level was negative indicating the positions have closed on a net basis. Market Buys can be used to enter a long or exit a short. Since the majority of volume was positions exiting through market buying, one can estimate to some degree of certainty that the majority of this volume was due to traders exiting shorts.
D --> Similar to C, we see most of the volume here was due to market buying with positions closing, potentially signaling that traders were exiting shorts at this price level.
E --> All of the above levels of high volume had a decrease in open interest at those levels, on a net basis. This is the first price level with high volume that actually has an increase in open interest (positive open interest delta), indicating traders were generally opening positions. In terms of market buys and market sells, it is not as dominant on one side as the previous levels, but majority of the volume is made up from market selling. If positions are opening through market selling, then one can estimate traders are entering shorts.
Last updated
