Tracking Daily Changes In Futures Open Interest

This topic entails the powerful insights one can obtain by monitoring the daily changes in open interest via the futures market, which as we know it’s a centralized and fully transparent market.

Did you know that one does not need to wait until Friday to keep track of the market's positioning in the futures market? In this topic, I'll show you the powerful insights one can obtain by monitoring the daily changes in open interest via the futures market, which as we know, it’s a centralized and fully transparent exchange for price discovery.

If as part of your routine you are looking for yet another piece of the puzzle, this is it. This lesson can help you strengthen your conviction in a particular trade by revealing the activity of futures traders the previous day, hence the potential intentions the following day. Definitely an aspect to consider.

What’s the oxygen of the market? Liquidity. This essential variable in the equation is what allows for volatility in the markets. So, how can we gain access to changes in liquidity? By tracking open interest, which happens to be the measure most related to liquidity.

Since open interest involves the total number of outstanding contracts in a particular instrument, we can, therefore, accept as true that an increase in open interest means there is more liquidity available, in other words, participants are adding business by opening new positions. On the contrary, if a market sees a decrease in open interest, it means that liquidity is shrinking.

How can we access daily changes in open interest?

You should access the following link via the CME website. No registration is required.

Ahead of the European open, the staff at the CME will publish the preliminary data from the previous day.

It looks at the day-to-day net change in open interest in a specific futures market. We will be looking at the daily change in open interest (buy/sell contracts) and whether there has been an increase or decrease, and we will then relate the number obtained to that day's price action.

As a heads up, you should never make use of this information as a standalone input but instead as yet another piece of evidence. This would then corroborate or not your initial thesis (directional bias), which should be built upon the analysis of multiple elements in line with your trading plan (top-down analysis, technicals, data releases, etc).

I will now provide a real-time example, describing the latest developments in the 6A contract (AUDUSD) for Monday, April 11th of 2016.

As seen in the illustration below, there was an increase in open interest of 2,795 contracts that day.

If you look at the AUDUSD chart for that particular day on April 11th, 2016, you will notice a commanding bullish candle. When combining these 2 elements, that is, a substantial increase on open interest that Monday, with price action ending up quite bullish, it suggests a bullish outlook the next day.

When an increase in open interest is combined with a conductive price action in the same direction, it means market participants (major institutions) are reinstating long-side business that day, and that alone should have bullish connotations for the AUDUSD market the following day.

It implies Monday's move had substance behind as new positions were added. It communicates the risk of follow thru the next day as turned out to be the case.

If the trade does not play in our favor, at the bare minimum, barring any major setbacks, it should increase the odds that any retracement below April 11th low won't happen without a serious fight to defend the long positions. If that’s the case, buy-side action near the day lows would also make a lot of sense if one can, of course, find an entry based on one’s specific approach to markets.

In case that we see a reduction in open interest, as was the case in the British Pound on April 11th 2016, as illustrated below, it implies that the bullish move seen that day is not being driven by new business being added but instead due to a removal of liquidity’ or the closing of short positions.

When our final reading is a reduction of open interest combined with a bullish daily candle, be aware that more often than not, the move is likely to exhaust/non-directional, as market participants bailout awaiting new value levels to re-engage in short-side business. See the GBP/USD example below.


Another piece of the puzzle worth accounting for

By identifying the daily changes in open interest, you can add yet another factor to support your bias for the day. Remember, this is not always the case, as sentiment/fundamentals/geopolitical events, etc can change the outlook in the blink of an eye.

However, you will be hard-pressed not to accept that these observations are well worth taking note of. It provides an actual real status on the market positioning based on the futures activity, which is used as the industry standard to assess players' positioning via the COT report.

I’d go as far as to suggest that if you find value in this tip, to collect both the open interest data in the currencies you trade and combine it with the price action seen. You will be surprised the number of times it can act as a proxy for the directional bias the next day.

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