Definition: Open interest is the total number of outstanding contracts that are held by market participants at the end of each day. Open interest measures the total level of activity into the futures market.

Description: If both parties to the trade are initiating a new position (one new buyer and one new seller), open interest will increase by one contract. If both traders are closing an existing or old position (one old buyer and one old seller), open interest will decline by one contract. If one old trader passes off his position to a new trader (one old buyer sells to one new buyer), open interest will not change.

Increasing open interest means that new money is flowing into the marketplace. The result will be that the present trend (up, down or sideways) will continue. Declining open interest means that the market is liquidating and implies that the prevailing price trend is coming to an end. Therefore, open interest provides a lead indication of an impending change of trend.

To determine the total open interest for any given market, we only need to know the totals from one side or the other, buyers or sellers, and not the sum of both.