Open interest is the total number of long and short positions open in a particular contract; it is major indicator for professional traders trading in high volume. Nifty future being most traded future contract, it is very important for nifty future traders to know the basics of open interest. Here I will explain you with the help of an example.
Trader P buys 1 lot nifty, trader Q sells 1 lot nifty – Total open interest in nifty future is 2 lots.
Trader P sells 1 lot nifty, trader R buys 1 lot nifty – Total open interest in nifty future is 2 lots.
Trader S sells 2 lots Nifty, trader T buys 1 lots nifty – Total open interest in nifty future is 6 lots.
This goes on and on, here the trading volume is much low, actually thousands of lots change hands every day. If you want to be successful trader in long run then you need to follow open interest seriously. Open interest can tell how strongly traders are positioned in a direction, so it’s really a priority of a nifty future trader to know how open interest works and how it can be used for trading.