Dalai Lama & Open Interest

A Market Tale (Sep 20, 2019)

Bull is contemplating existence watching two Dalai Lamas side by side

“This market is crazy,” Bull remarked, “Just when you see a clear breakdown for BTC, you are presented with a counter-move that fully retraces the breakdown.”

“Seems like the whales are also confused,” nodded Bear. He has lost a bunch of money trading those breakdowns, but he was confident in his strategy. “The chop will end, and we will enjoy the trend once again.”

“The trend will be massive,” envisioned Bull, “So many people have taken positions within the range. Just look at Open Interest metric — it has already reached the highest values in history, and it continued to grow after that move.”

BitMEX Open Interest (recent values)

“What exactly is Open Interest?”

“Simple: it’s the total number of open positions. For example, when Alice buys 10000 contracts from Bob, Open Interest (OI) increases by 10000.”

“So it’s the number of contracts in existence?”

“That’s right.”

“How is it different from volume?”

“Volume is the number of contracts traded, not currently existing. For example, when Alice buys 10000 contracts and then sells 10000 contracts after a minute, volume increases by 20000, but Open Interest remains the same”

“And why is it important to keep track of Open Interest?”

“Because it represents the “power” of price range. The more positions are being taken within the range, the more positions will be closed when we break out.”

“So either long or short liquidation cascade will happen?”

“Yes, and a massive one.”

“Fireworks!”