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Introduction
Volume is a measurement of the number of contracts traded in a day. It
is a sign of market activity. Open Interest is the number of contracts
outstanding or those held overnight. This is a measure of market
participation. In liquid markets these numbers will be consistently
higher than in a thin or illiquid market. These numbers are always a day
behind, because it takes the exchange that long to tabulate these
figures. When displayed, Track 'n Trade Pro offsets these values to put
them beneath their respective data in the chart, consequently there is
not a value for either volume or open interest for the most recent day
of any contract. Volume and Open Interest indicate participation and
urgency. This tells the trader which market is the correct one to be in
based on its participation.
Interpretation
Volume measures the number of contracts that changed hands during that
trading session. This indicator of market activity can show whether
trade was heavy or light. That will give you an idea of the possible
volatility present in that market.
Contracts that have not been settled at the end of the day are
represented by open interest. New buyers and sellers entering or exiting
the market change open interest.
The key to this indicator is to look at volume as a percentage of open
interest. VOI does not give straight buy or sell signals or have set
trading rules. Rather it shows the cyclical tendencies of the market.
The flow of the underlying market can be represented. Looking at VOI
shows whether new buyers or sellers are entering the market or if they
are liquidating positions.
There are basic common sense rules for this indicator. If the prices are
up and VOI is increasing, the market is strong. If the prices are up and
VOI is declining, the market is getting weaker. If the prices are down
and VOI is rising, the market is getting weaker. If the prices are down
and VOI is declining, the market is gaining strength.
In bull markets, volume tends to increase during rallies, and tends to
decrease on reactions. In bear markets, volume tends to increase on
declines and decrease during rallies. Trading volume usually increases
dramatically at tops and bottoms.
Looking at the volume and open interest will show you which contract
month to be in. When looking at trading a specific commodity, it is
important to know which contract month to be in. Commodities expire or
are delivered several times a year. This creates a situation where
traders are constantly "rolling over" from one contract month to the
next. This means that traders need to know which month to be in. VOI is
the tool that shows us which contract month to be in. The months that
have the highest open interest are usually the best to be in because
they are the most liquid. The months that have higher volume will afford
the trader a better opportunity to enter and exit the market.
Example of V/OI in the Indicator Window:
Calculation
This study has no computations. The values for the volume and open
interest are transmitted from the exchanges. However, the actual volume
and open interest figures are always one day behind price information.
You will not know Monday's volume and open interest until Tuesday at
approximately noon (for U.S. markets - central time). That is due to the
exchanges and their reporting requirements.
Customizing
To change the settings of this indicator, open the Program Options
screen by clicking the "Program Options" button located on the main
Toolbar.
See the Program Options section for more details on changing the
settings.
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