Free Online Volume and Open Interest Lessons
VOLUME AND OPEN
INTEREST AS SECONDARY INDICATORS
Most
technicians in the financial markets use a
multidimensional approach to market analysis by tracking
the movement of three sets of figures-price, volume, and
open interest. Volume analysis applies to all markets.
Open interest applies primarily to futures markets.
It was stated then
that even though volume and open interest figures are
available for each delivery month in futures markets,
the total figures are the ones generally used for
forecasting purposes. Stock chartists simply plot total
volume along with the accompanying price.
Most
of the discussion of charting theory to this point has
concentrated mainly on price action with some mention of
volume. Here, we'll round out the three
dimensional approach by taking a closer look at the role
played by volume and open interest in the forecasting
process.
Let's
begin by placing volume and open interest in their
proper perspective.
Price is
by far the most important. Volume and open interest
are secondary in importance and are used primarily
as confirming indicators. Of those two, volume is
the more important.
Volume
Volume
is the number of entities traded during the time period
under study. Because we'll be dealing primarily with
daily bar charts, our main concern is with daily volume.
That daily volume is plotted by a vertical bar at the
bottom of the chart under the day's price action.
Volume
can be plotted for weekly bar charts as well. In that
case, total volume for the week would simply be plotted
under the bar representing that week's price action.
Volume is usually not used, however, on monthly bar
charts.
Volume
analysis is used in all financial markets-futures,
options, and stocks. Open interest applies only to
futures and options. But, since futures and options are
traded on so many stock market vehicles, some
understanding of how open interest works can be useful
in all three financial arenas.
Free
Online Volume and Open Interest Lessons