Identifying trend weakness : (complex breakdown)

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Open Interest profiles can help us locate where the most positions in the trend's direction have opened and closed.

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The idea is that in an uptrend, we are looking for where new long positions have entered, and in downtrends, we're looking for where new shorts have entered.

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This is because these are the positions that will be defending price from moving in the opposite direction of the trend. They do this by stacking onto their positions, adding liquidity in the opposing direction, creating buy or sell walls.

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Hence, we can assume that once the majority of new positions in a trend's direction become underwater when the price continuously trades above or below their short or long positions, they will likely look to partially or fully close their positions.

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In return, they must open a position in the opposite direction, fueling momentum in the opposing direction of the trend.

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Additionally, further momentum may occur, opposing the trend as fewer orders defend their positions in the books, making it easier for the price to move against the trend's direction.

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In the image here, you can see an example of a downtrend weakness. The tool used is an Open Interest profile.

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For uptrends, use long exit vs. new long, and for downtrends, use new short vs. short exit profiles.

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Profiles work best in cases where there is a clear area where the majority of new positions have opened in the trend.

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Take a look here.


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