Futures Open Interest Analysis

Predicting market direction based on Futures Open Interest

In this blog, I am going to explain how we can leverage with Open Interest Analysis of Futures present at optionstrategy.co.in. I have back tested this functionality and have observed that it is accurate around 68%.

Back testing strategy

I collected the nearest expiry futures open interest data for past 6 month. I observed the trend for futures and price. I took the difference between T and T-1 days' open interest and price , T and T-2 days, T and T-3 days' open interest and price. I gave maximum weightage to nearest day differences ie. T and T-1. I observed that if they were in same direction, the trend continued and if they were in opposite direction  the trend reversed. I assumed that we were buying at days end of price and next days close price was at which were selling. 
The success rate for this observation was approx 68%. 

How to analyze Open interest at your own

1. Go to URL optionstrategy.co.in and click on "Open Interest Futures" menu button at left.

2.Now select one of the available script. I have used specific scripts which are more liquid.

3. Default number of days shown is 3. You can change the number of days if you want to do analysis of more data. I prefer generally 3 days.
4. Click on OI indicator button.

5. A graph will appear below. Check out how the price and open indicator are varying.

 

In this graph you can see blue bars are showing % change in Open interest and red bars are showing % change in price. Orange bars just represent their multiplication to see what is their net effect. 

Generally, if open interest and price move in  same direction then this trend is expected to continue. I am representing them with bar in positive direction. This represents that current trend whether it is increase or decrease in price will continue. If this bar is in negative direction then it means the current trend is going to reverse soon. here is one sample graph based on DLF open interest  movement.

We also need to see how strong this impact is. open interest change should be greater than price change. If open interest change is minor, then we should ignore it. 

 

There could be chances that T and T-1 is showing positive direction and T and T-2 are showing negative direction.  In such scenario, I would advise not to use this indicator. Give maximum weightage to nearest date differences.

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Happy Trading!!!