What is Open Interest?
Traders often analyse open interest to gain valuable insights into the total amount of money being invested via active positions at any given moment.
When it comes to exchanges, open interest is the collective notional value of all active positions, comprising both long and short positions. It can be presented per market or in cumulative form.
When used in conjunction with other analyses, this information can give traders a sense of which side of the market the majority of market participants are positioned on. If there are too many traders with positions that are opposite of the market direction, it may result in a volatile market movement as prices continue to move against them, forcing them to close their positions at a loss.
You can check the real-time open interest on Drift in the Overview tab: https://app.drift.trade/overview. The right-hand side of the screen displays the total open interest on Drift.
How to Apply Open Interest in Trading
To get a more comprehensive view of each individual market, this dashboard is particularly useful. Here, traders can keep track of open interest and long/short ratios for all pairs on Drift. As demonstrated by the example data in the graph below, 65% of the open interest in SOL-PERP consists of long positions. Consequently, if the market begins to decline, these traders will be compelled to close their long positions and sell into the market, driving the price down even further.
The futures market is large, and the combined open interest is what influences the market across all exchanges. To generate a consolidated graph of open interest across the largest cryptocurrency exchanges, free tools like these are helpful. While this data alone does not indicate which side of the market most traders are positioned on, traders can utilize it in conjunction with aggregated predicted funding rates to determine on which side of the market the majority of traders are positioned.
As an example, traders can use the graph above to their advantage by observing a rapid increase in open interest alongside a drop in funding rates, which would indicate a rise in short positions and trader can conclude that the majority of traders expecting a bearish trend. The same can be applied in the opposite scenario. A surge in open interest and predicted funding rates suggest an influx of long positions, which it accompanied by a steep drop in price this may prompt traders to exit their positions, further pushing the market down.
Open interest can be a useful tool in identifying trading opportunities. By integrating it with other forms of analysis, traders can exploit changes in open interest to pinpoint market opportunities where a substantial number of participants may have taken positions against the market's direction.
Start Trading On Drift
In case you’re new to Solana, check out some of our guides to help get you started on your DeFi journey.
- How To Set Up A Wallet To Trade On Drift
- How To Deposit & Withdraw Funds On Drift
- How To Transfer Funds From A CEX Onto Drift
- How To Bridge Assets To Trade On Drift
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Nothing in the text should constitute financial advice, Drift is not responsible for any losses that may occur by following the contents of this article. All content is provided here for educational purposes only.