d Open Interest: Metrics Tha…

COMMODITIES T R A D I N G S T R AT E G I E S

Volume and Open Interest: Metrics That Give

Clues on Commodity Price Action

BY ANDREW HECHT Updated June 25, 2019

In the world of trading commodities, it is important to look for as many clues as possible when
making decisions. Analysis of markets requires discipline and hard work. However, that hard
work can pay off when you are able to put the pieces of a complicated puzzle together. There
are two types of analysis involved in the decision-making process. Technical analysis involves
the study of charts, price momentum, and patterns. Fundamental analysis concentrates on
the supply and demand picture -- production versus consumption.

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Two tools that I like to use in order to understand the market flow and sentiment in all
commodities that trade on futures exchanges are volume and open interest. These two
metrics often validate or invalidate price moves. Volume and open interest are important
technical metrics when it comes to understanding price direction.

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Volume

Volume is the total number of futures contracts traded in a specific market. The higher the
volume, the more actively traded or more liquid a futures contract or commodity is. Technical
analysts use volume as a tool because it confirms a price trend. When a market starts moving
higher or lower in price the analyst will immediately investigate the trading volume during the
price move. Rising volume along with rising price generally confirms or validates strong bull
market action. Rising volume along with falling price generally confirms or validates strong
bear market action.

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Technicians also employ volume as a tool to spot trend reversals. When falling volume
accompanies rising or falling prices, a technical analyst will generally conclude that a market is
running out of steam in one particular direction. It then becomes time to search for a
correction point, usually support or resistance, where the price will reverse from the current
trend.

Volume data is often available free of charge on many charting packages and can be viewed
on commodities as well as other assets that trade on futures markets. While volume is one
important tool, open interest is another important technical metric for traders and investors to
monitor.

Open Interest

Open interest is the total number of open and not yet closed long and short positions in
futures contracts for a particular commodity. While volume counts every contract that trades,
open interest only counts those contracts that still have open market risk. This is a key tool
when it comes to understanding what market participants are thinking and doing at specific
times. Rising open interest indicates the strength behind a move. If a market is moving higher
or lower and rising open interest accompanies that move it often signals validation of the
direction of the move and that the price is likely to continue in that same direction.

Decreasing open interest can signify that a market is entering a period of less active trading
because market participants are not taking new positions and are closing out existing ones.
Fortunately, commodity exchanges such as the Chicago Mercantile Exchange (CME) and the
Intercontinental Exchange (ICE) publish volume and open interest data daily and in some
cases in real time. The Commodity Futures Trading Commission (CFTC) publishes data called
the Commitment of Traders to report on Friday afternoons each week. This report breaks down
open interest according to different classes of market participants and outlines whether they
are holding long or short positions. The CFTC report lists positions held by producers,
merchants, processors, users, swap dealers, those managing money, other reportable
positions, and non-reportable positions.

This breakdown of open interest can be extremely helpful when it comes to understanding
exactly who is doing what in a particular commodity futures contract.

Using volume and open interest together as part of your overall analysis of markets will help
you to become a better trader or investor. Volume and open interest are two important pieces
when it comes to solving the puzzle of markets and forming an educated and substantiated
opinion on price direction.
CONTINUE READING +

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