Volume: Futures Open Intrest

VOLUME

Another piece of important information should be included on the bar chart volume. Volume represents the total amount of trading activity in that market for that day. It is the total number of futures contracts traded during the day or the number of com­mon stock shares that change hands on a given day in the stock market. The volume is recorded by a vertical bar at the bottom of the chart under that day's price bar. A higher volume bar means

Figure 3.7 A closer look at the Intel daily bar chart. Each bar measures the day’s price range. The opening price is marked by the small tic to the left of each bar. The bars along the bottom measure each day’s volume.

the volume was heavier for that day. A smaller bar represents lighter volume. A vertical scale along the bottom of the chart is provided to help plot the data, as shown in Figure 3.7.

FUTURES OPEN INTEREST

Open interest is the total number of outstanding futures contracts that are held by market participants at the end of the day. Open interest is the number of outstanding contracts held by the longs or the shorts, not the total of both. Remember, because we're dealing with futures contracts, for every long there must also be a short. Therefore, we only have to know the totals on one side. Open inter­est is marked on the chart with a solid line along the bottom, usu­ally just above the volume but below the price. (See Figure 3.8.)

Figure 3.8 A daily line chart of a Treasury Bond futures contract, the vertical bars along the bottom measure the total daily volume. The solid line along the middle represents the total outstanding open interest for the Treasury Bond futures market.

Total Versus Individual Volume and Open Interest Numbers in Futures

Futures chart services, along with most futures technicians, use only the total volume and open interest figures. Although figures are available for each individual delivery month, the total figures for each commodity market are the ones that are used for fore­casting purposes. There is a good reason for this.

In the early stages of a futures contract's life, volume and open interest are usually quite small. The figures build up as the contract reaches maturity. In the last couple of months before expiration, however, the numbers begin to drop again. Obviously, traders have to liquidate open positions as the contract approaches expiration. Therefore, the increase in the num­bers in the first few months of life and the decline near the end of trading have nothing to do with market direction and are just a function of the limited life feature of a commodity futures con­tract. To provide the necessary continuity in volume and open interest numbers, and to give them forecasting value, the total numbers are generally used. (Stock charts plot total volume fig­ures, but do not include open interest.)

Volume and Open Interest Reported a Day Late in Futures

Futures volume and open interest numbers are reported a day late. Therefore, the chartist must be content with a day's lag in obtaining and interpreting the figures. The numbers are usual­ly reported during the following day's trading hours, but too late for publication in the day's financial newspapers. Estimated volume figures are available, however, after the markets close and are included in the following morning's paper. Estimated volume numbers are just that, but they do at least give the. futures technician some idea of whether trading activity was heavier or lighter the previous day. In the morning paper, therefore, what the reader gets is the last day's futures prices along with an estimated volume figure. Official volume and open interest numbers, however, are given for the day before. Stock chartists don't have that problem. Volume totals for stocks are immediately available.

The Value of Individual Volume and Open Interest Numbers in Futures

The individual open interest numbers in futures do provide valu­able information. They tell us which contracts are the most liquid for trading purposes. As a general rule, trading activity should be lim­ited to those delivery months with the highest open interest. Months with low open interest numbers should be avoided. As the term implies, higher open interest means that there is more interest in certain delivery months.

WEEKLY AND MONTHLY BAR CHARTS

We've focused so far on the daily bar chart. However, be aware that a bar chart can be constructed for any time period. The intra­day bar chart measures the high, low, and last prices for periods as short as five minutes. The average daily bar chart covers from six to nine months of price action. For longer range trend analysis, however, weekly and monthly bar charts must be used. The value of using these longer range charts is covered in Chapter 8. But the method of constructing and updating the charts is essentially the same. (See Figures 3.9 and 3.10.)

On the weekly chart, one bar represents the price activity for the entire week. On the monthly chart, each bar shows the

Figure 3.9 A weekly bar charts of the U.S. Dollar Index. Each bar represents one week’s price data, the weekly chart allows for chart analysis of longer range price trends, usually in the vicinity of five years.

Figure 3.10 A monthly bar chart of the U.S. Dollar Index. Each bar represents one month’s price data. By compressing the data even further, the monthly chart allows chart analysis for periods as long as twenty years.

entire month's price action. Obviously, weekly and monthly charts compress the price action to allow for much longer range trend analysis. A weekly chart can go back as much as five years and a monthly chart up to 20 years. It's a simple technique that helps the chartist study the markets from a longer range perspective—a valu­able perspective that is often lost by relying solely on daily charts.

CONCLUSION

Now that we know how to plot a bar chart, and having intro­duced the three basic sources of information—price, volume, and open interest—we're ready to look at how that data is interpreted. Remember that the chart only records the data. In itself, it has lit- tie value. It's much like a paint brush and canvas. By themselves, they have no value. In the hands of a talented artist, however, they can help create beautiful images. Perhaps an even better comparison is a scalpel. In the hands of a gifted surgeon, it can help save lives. In the hands of most of us, however, a scalpel is not only useless, but might even be dangerous. A chart can become an extremely useful tool in the art or skill of market fore­casting once the rules are understood. Let's begin the process. In the next chapter, we'll look at some of the basic concepts of trend and what I consider to be the building blocks of chart analysis.