Understanding Open Interest (OI)
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Why is OI increasing? Who is being proactive? Who is being reactive?
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OI (Open Interest) is the total number of open contracts (futures/options) currently in the market. However, there is a common misconception:
When OI increases, it does not mean that only the Long side is entering positions. For every new Long position, there will always be a corresponding Short position – trading always has two sides.
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Simply put:
• When you place a market order and hit the red button, you are a proactive short.
• When you place a market order and hit the green button, you are a proactive long.
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Concepts:
• Proactive Long (Aggressive Long): Buying with a market order, attacking waiting limit sell orders.
• Proactive Short (Aggressive Short): Selling with a market order, attacking waiting limit buy orders.
• Passive Liquidity: Limit orders sitting idle, waiting to be matched by market orders.
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Common scenarios:
•📈 OI increases + Price increases → Longs are in control, shorts are reactive
•📉 OI increases + Price decreases → Shorts are in control, longs are reactive
•📊 OI increases + Price remains mostly unchanged → There is a major battle, liquidity absorbs buying/selling pressure