Open Interest

Open Interest = Long Positions + Short Positions, the sizes of long and short positions are always equal, because as long as there is a buy order executed for a long position, there will be an equal number of sell orders executed for a short position.

The changes in open interest can be distinguished by "New Positions/Old Positions" and "Closing Positions/Open Positions", leading to the following 4 scenarios:

1. In a trending market, if open interest continues to increase, it likely indicates the continuation of the trend. New long positions are being built (buying), and new short positions are being built (selling); conversely, this situation means fierce conflict between longs and shorts, with both sides increasing their positions and significant market divergence. We can use this to help judge that the trend is likely to continue: highly leveraged shorts can easily be squeezed and forced to buy back to close their positions, leading to a large number of buy orders and further pushing the market up.

2. In a trending market, if open interest decreases, it means that divergence is reducing, with losers closing their positions and winners realizing profits. Without external stimulus for new positions, the trend may come to an end. Old longs closing their positions (selling) correspond to old shorts closing their positions (buying).

From the 4-hour chart of BTC in Figure 1, we can see that during the recent downtrend, it conforms to these two principles. In the downtrend marked by the red arrow, open interest continues to increase, indicating fierce conflict between longs and shorts, and the downtrend continues. However, after the drop on 11.21, open interest peaked and began to decline, indicating that the second point mentioned is happening: divergence is starting to decrease, with old longs cutting losses and closing positions in defeat, and old shorts also taking profits and closing positions. The trend is beginning to slow down, likely marking the start of a reversal.