Open Interest (OI) is a key indicator in the derivatives market that represents the total number of outstanding contractsóboth futures and optionsóthat have not yet been settled. It helps traders and investors gauge market activity, liquidity, and the strength of ongoing price trends. Unlike volume, which measures the number of contracts traded during a specific period, open interest reflects the total active positions remaining in the market.

In simple terms, when a new buyer and seller enter into a contract, the open interest increases by one. Conversely, when both parties close their positions, the open interest decreases. Therefore, rising OI often indicates the creation of new positions, while a decline suggests unwinding of existing contracts. Traders closely monitor these changes to assess whether a trend is gaining or losing momentum.

For instance, an increase in price accompanied by rising open interest suggests a bullish trend backed by fresh buying. On the other hand, falling prices with increasing OI signal a bearish trend driven by new short positions. However, if open interest declines while prices move sharply, it may indicate profit booking or trend exhaustion rather than a strong directional move.

Understanding open interest is essential for building informed trading strategies in futures and options. It allows traders to identify potential breakouts, confirm market trends, and measure participation levels. However, OI should not be used in isolation. It works best when combined with other technical indicators such as price action, volume, and volatility to form a comprehensive market view. By analyzing open interest effectively, investors can make more data-driven and disciplined decisions while managing risk in the derivatives market.