Helping push you closer to the 'edge'.

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Don Dawson

06 Apr, 2009

in Commodities and 2 more

Ever wonder what makes a winning trader consistent? In my opinion that consistency is due to the trader having his own "edge" over other traders. This "edge" is what each trader must find for himself. Often traders focus on their results so much that they forget that every other trader in the world is doing the same thing: Trying to profit from price action alone. Trading this way can make you money, but what if you had an added edge to your strategy? In Commodity Futures, we have something called Open Interest that just may provide that advantage.

What is This Open Interest?

  • Open Interest is the total number of outstanding contracts that are held by market participants at the end of the day.
  • Contracts that are held overnight have much more conviction behind them. They assume more risk by holding these positions.
  • Another way of looking at Open Interest is the total number of Futures contracts that have not yet been exercised (offset), contract expired or fulfilled by taking delivery.
  • Primarily applies to the Futures market (Options have Open Interest also). This indicator is often used to confirm trends and reversals.
  • A gauge of the money flow coming into and out of the Futures market.
  • For each buyer there must be a seller to create a contract. To determine the total open interest we need only to know the totals from one side, buyers or sellers, not the total of both.
  • Due to exchange rules these figures are not released until around noon the following day. For example, Monday's Open Interest is not available to the "public" until Tuesday around noon. Being an exchange member can get you these figures earlier in the day. I guess membership does have its privileges.
  • This figure reported each day represents the increase or decrease in the number of open contracts for that day. The number appears as a positive or negative net change from the prior day.
  • On charts the Open Interest is typically expressed as a horizontal line going across the volume bars at the bottom of the chart.

How To Figure Open Interest

  • For every trade made and held until after the close there is some form of impact on Open Interest.
  • If both traders are initiating a new position (one buyer and one seller), Open Interest will increase by one contract.
  • If both traders are closing an existing position (one old buyer and one old seller), Open Interest will decline by one contract.
  • The last possibility is one old trader passing off his position to a new trader (one old buyer sells to one new buyer). In this instance, Open Interest will not change.
    Gaining Your "Edge" Monitoring Open Interest

Where to get Open Interest figures:
1) The Exchange that your Commodity trades on. Look under Price Data.

2) Moore Research Company http://www.mrci.com/ohlc/

There are two types of Open Interest figures to look at:
1) Each contract month has its own Open Interest.

2) There is also a Total Open Interest. This is the sum of all contracts Open Interest traded yesterday.

You should follow the Total Open Interest for net changes each day. The reason is that as contracts get closer to expiration, the Open Interest "rolls" out of that month into the next contract month traded. This gives the illusion that the market is losing strength because money is leaving (Open Interest is declining). In reality the money is just rolling forward to the new contract.

Make sure your charting package is plotting Total Open Interest to get an accurate reading.

Open Interest increasing means that new money is coming into the commodity. The current trend (up or down) should continue in the current direction.

Open Interest declining means that the market is going through a distribution phase and means the trend may be coming to an end. Seeing this pattern after a prolonged move is your first early warning that there is a loss of momentum in the market.

Commodity Futures Trading Commission (CFTC) - Commitment of Traders Report
Also known as the "COT" report.

These reports describe the Open Interest positions of three different categories of traders: 

  1. Large Speculators (Hedge Funds, Commodity Pools, Commodity Trading Advisors etc)
  2. Commercial Traders (any person or company that uses the actual Commodity)
  3. Small Speculators (non-reporting)

For a detailed explanation of how to read these reports go here:
http://www.cftc.gov/marketreports/commitmentsoftraders/cot_about.html#P16_3370

These reports are released each Friday describing the activity of traders as of Tuesday that same week. There is no fee for this data.

The weekly reports can be emailed to you or you can go here:
http://www.cftc.gov/marketreports/commitmentsoftraders/index.htm

There are several websites that allow you to see historically what each of these groups of traders have been doing. The actual trend of these numbers is more important than just the raw data out each week.

A website that has good graphics for this is:
http://www.nowandfutures.com/cot.html

We know that "smart money" moves the markets. So by watching what the trend of the Large and Commercial traders are doing as opposed to the Small speculators can give us an added "edge" also - by using Open Interest and the Commitment of Traders report, you can now enjoy that little extra "edge" you have compared to traders who just use price activity. As with any tool we use in the markets, you cannot use Open Interest alone. You should use it in conjunction with price activity and your other indicators you use. This was a general description of using these tools. If you take the time and make the extra effort to do some more research on these tools, I believe you will improve your trading.

Keep looking for that "edge"; the competition will wish you had not.


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excellent article, wealth of useful links and information. it is up to a trader to ran it through statistical analysis and see if one can benefit from it or not.. some build quantitative systems based on price-volume action alone. in my opinion though looking at price action alone is like looking at a carrot waved at front of a donkey.. if there's a way to peer in to a mind of a market maker even get a short glimpse of the inside the door action, I'm for it.

Aug 07, 2009

Member (1 post)

anyone read it want to comment ?

Apr 07, 2009

Member (10388 posts)

Ever wonder what makes a winning trader consistent? In my opinion that consistency is due to the trader having his own "edge" over other traders. This "edge" is what each trader must find for himself. Often traders focus on their results so much that they forget that every other trader in the world is doing the same thing


The article was interesting up to this point and then drifts off into useless waffle that basically contradicts the entire introduction. A waste of time.

Apr 06, 2009

Member (6067 posts)

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