E. Volume and Open Interest

" Action may not always bring happiness, but there is no happiness without action ”

A. Volume

Volume is the number of units traded during a given time period,which is usually a day. The analysis of volume is a very important element of technical analysis. Volume provides important secondary confirmation of the price action on the chart and often gives advance warning of an impending shift in trend.

Low volume level are characterictic of the indecisive expectations that typically occur during consolidation. Low volume also often occurs during the indecisive period during market bottoms.

High volume levels are characteristic of market top when there is a strong consencus that price will move higher. High volume levels are also very common at the beginning of new trends.

Volume can help determine the health of an existing trend. A healthy up trend should have higher volume on the upward legs of the trend, and lower volume on the downtrend. Volume measures the pressure behind a given price move. As a rule, heavier volume (marked by larger vertical bars at the bottom of the chart) should be present in the direction of the prevailing price trend. During an uptrend, heavier volume should be seen during rallies, with lighter volume (smaller volume bars) during downside corrections. In downtrends, the heavier volume should occur on price selloffs. Bear market bounces should take place on a lighter volume.

Some of Volume indicators :

1. Volume oscilator

This indicator display the difference between two moving averages of security`s volume. You can use the difference between 2 moving averages of volume to determine if the overall volume trend is increasing or decreasing. When the price is above zero, it indicates that the shorter - term volume moving average has risen above the longer - term volume moving average and vice versa.

it is belived that the rising prices couple with increased volume and falling price coupled with decreased volumr is bullish, conversely if volume increase when price fall and volume decrease when price rise, the market is showing signs of underlying weakness. The theory is straight forward, rising prices copled with increased volume signifies increased upside participation that should lead to a continued move and vice versa.

2. On Balance Volume

On balance volume is a momentum indicator that can be measured by using the connection volume analysis and the change of price. OBV discovered by Joe Granville at his book titled " New strategy of daily stock market timing for maximum profits'.

The OBV line is usually plotted along the bottom of the price chart. The idea is to make sure the price line and the OBV line are trending in the same direction. If prices are rising, but the OBV line is flat or falling, that means there may not be enough volume to support higher prices. In that case, the divergence between a rising price line and a flat or falling OBV line is a negative warning. OBV can be regarded in the uptrend if the OBV at the higher points than previous points. If the share prices are in uptrend the OBV should in uptrend too, but if the price and the OBV are contradicted, this will be a signal the trend will reserve.

B. Open interest

Open interest is the total number of futures or options on futures contracts that have not yet been offset or fulfilled by delivery. It is an indicator of the depth or liquidity of a futures market, which influences the ability to buy or sell at or near a given price.

Open interest can be a tricky concept, especially for beginners. In a nutshell, here's how open interest is calculated: If a new buyer (a long) and new seller (a short) enter a trade, open interest increases by one. However, if a trader already holding a long position sells to a new trader wanting to initiate a long position, open interest remains the same. And if a trader holding a long position sells to a trader wanting to get rid of his existing short position, open interest decreases by one.

Open interest increase when a buyer and seller create a ne contract, this happen when buyer initiates a long posisition and the seller initiates a short posisition. Open interest decrease when buyer and sellers liquidate existing contract. This happens when buyer is selling an existing long posisition and the sellers is covering an existing short posisition.