New Trading Systems and Methods, Fourth Edition

CHAPTER 12

Volume, Open Interest, and Breadth

Patterns in volume have always been tied closely to chart analysis of both the stock and futures markets. It is a valuable piece of information that is not often used, and one of the few items, other than price, that is traditionally considered valid data for the technician. Nevertheless, there has been little research published that relates these factors to futures markets; its popular use has assumed the same conclusions as in stock market analysis.

The stock and futures markets have two other measures of participation that are related, yet not the same. In equities, the large number shares being traded allow for measurements of breadth. In the same way that the stock index has become a popular measure of overall market trend, the breadth of the market is the total number of stocks that have risen or fallen during a specific period. When you have the ability to view the bigger picture of market movement, breadth seems to be a natural adjunct to the index.

In futures, open interest is the measurement of those participants with outstanding positions; it is the netting out of all open positions (longs and short sales) in any one market or delivery month, and gives an understanding of the depth of participation and anticipated volume. A market that trades only 10,000 contracts per day but has an open interest of 250,000 is telling the trader that there are many participants who will enter the market when the price is right. These are ...