Well, today I came across a guide which explained open interest in a manner that actually made sense to me. Even though I had always seen that term on charting sites and had just ignored it because it sounded as if it was something only professional traders needed to worry about, it turns out that it's not at all complicated, and in fact it's a useful piece of knowledge even if you're just watching the market as I am.

Well, what is it actually like? Open interest is simply the total number of futures or options contracts which are still "open" at the present time, that is to say that no one has closed them yet. Each contract has to have both a buyer and a seller. If a new buyer and a new seller each open a new position, then the number rises. If one person closes their position and at the same time another person closes theirs, the number falls. But if one person sells their position to another person who is opening a new one, the number remains the same even though it has changed hands.

It was that last point which made it clear to me. I had always assumed that a high trading volume necessarily meant that something significant was taking place. That doesn't always turn out to be the case. There can be a great deal of volume in a day yet it might simply be existing traders dealing with one another, with no new money flowing in. While volume is reset each day, open interest isn't; it just keeps running total.

The part I found genuinely useful was this simple four way way to read price and open interest together:

• Price up + open interest up = real buyers coming in, strong move
• Price up + open interest down = shorts just covering, not real new buying, can fizzle out fast
• Price down + open interest up = fresh shorts piling in, real bearish pressure
• Price down + open interest down = people just giving up and closing out, not new selling pressure

I prefer this since it's simple; you don't have to be a expert at charts to understand it. What it's actually doing is showing you whether a price movement has 'real' money supporting it or whether it's just people settling their old positions.

As a person who's just watching from the side, I think that kind of data helps to explain a great deal of the fake pumpings and fake dumps which we constantly see in the crypto market. If the price rises by 5per cent and everybody becomes excited, yet open interest doesn't change much, it's probably just short sellers who are panicking and buying back rather than there being a real surge of new buyers. In the same way, when the price plummets and people shout "it's all over", it may simply be the exhausted long positions closing out, not a new wave of sellers rushing in.

The article also had a valid argument concerning the fact that you shouldn't rely on a single exchange's figure. At any given time, various platforms and data aggregators can give different open interest figures for the same coin since they calculate or update the figures in different ways. Therefore, if you really want to take notice of such information, it seems sensible to check more than one source before making a reaction.

One thing that remained with me was the point about manipulation risk. Because open interest figures are public and people keep a close eye on them, it's reported that some traders deliberately open and then close large positions just to create the impression that something is taking place, in order to lure other people in before reversing their positions. This seems to occur more frequently with smaller altcoins than with things like Bitcoin, since it would take a lot more money to fake a signal on Bitcoin.

In summary, there's no fundamentally significant point being made here, but it does fall into the category of small pieces of the puzzle that enable you not to be deceived by a green or a red candle. I'm not someone who follows trading signals, merely a person who's trying to get a better understanding of the noise, and this open interest aspect is another layer which helps explain why prices at times move without any real cause and at other times move for a very real cause.

Well, that's my simple view of the matter. If you're new to it all, just remember that volume shows you activity and open interest shows commitment, two different things and it's easy to get them mixed up.