Hello friends.
We have evolved our understanding of open interest by looking through hundreds of different altcoin charts and ultimately came to the conclusion that everything we thought we knew was a lie.
We had thought that open interest functioned like this:
Rising open interest means the current trend is strong, and falling open interest means the current trend is weak. This could make sense because let's say the price is rising and open interest is rising, that means more people are shorting and the shorts will fuel a move up, right?
We learned this idea from Bitcoin Trading Challenge. But in this case, he was dead wrong, and the charts demonstrate this clearly.
Go on Coinalyze right now and pull up a chart of Dogecoin. Scroll back to a time when Dogecoin pumped. Literally, any time when it pumped. Then add the aggregated open interest onto that chart. What you will find is that when this coin pumps sharply, and open interest also increases sharply, the move almost always leads to an equally sharp crash which causes open interest to fall. How do we explain this occurrence?
coinalyze.net/dogecoin/open-interest/
I have a new theory that I came up with myself this time.
Sharply rising open interest means that retail traders have become very exuberant and are opening lots of highly leveraged long positions. Since these positions are high leverage, the open interest also falls when prices start to tick down, as their positions are closed off at a loss. It's true that shorts are also opening, but this is not very relevant since retail is crowding the long trade and the market thoroughly enjoys punishing retail exuberance.
The strategy:
Look for an altcoin that rises sharply in both price and open interest and then ticks down sharply to show a change of trend. Short with a stop clean above the local high, and ride the crash down to the base of the pump.
Notes:
This strategy should not be used on heavily illiquid shitcoins. These should not be traded at all, in our view. They present too much risk that the trade may have high slippage for an exit. Additionally, if there has been a strongly positive news event like the Elon Musk Twitter buyout for Dogecoin, you will see that this strategy is not effective.
We have evolved our understanding of open interest by looking through hundreds of different altcoin charts and ultimately came to the conclusion that everything we thought we knew was a lie.
We had thought that open interest functioned like this:
Rising open interest means the current trend is strong, and falling open interest means the current trend is weak. This could make sense because let's say the price is rising and open interest is rising, that means more people are shorting and the shorts will fuel a move up, right?
We learned this idea from Bitcoin Trading Challenge. But in this case, he was dead wrong, and the charts demonstrate this clearly.
Go on Coinalyze right now and pull up a chart of Dogecoin. Scroll back to a time when Dogecoin pumped. Literally, any time when it pumped. Then add the aggregated open interest onto that chart. What you will find is that when this coin pumps sharply, and open interest also increases sharply, the move almost always leads to an equally sharp crash which causes open interest to fall. How do we explain this occurrence?
coinalyze.net/dogecoin/open-interest/
I have a new theory that I came up with myself this time.
Sharply rising open interest means that retail traders have become very exuberant and are opening lots of highly leveraged long positions. Since these positions are high leverage, the open interest also falls when prices start to tick down, as their positions are closed off at a loss. It's true that shorts are also opening, but this is not very relevant since retail is crowding the long trade and the market thoroughly enjoys punishing retail exuberance.
The strategy:
Look for an altcoin that rises sharply in both price and open interest and then ticks down sharply to show a change of trend. Short with a stop clean above the local high, and ride the crash down to the base of the pump.
Notes:
This strategy should not be used on heavily illiquid shitcoins. These should not be traded at all, in our view. They present too much risk that the trade may have high slippage for an exit. Additionally, if there has been a strongly positive news event like the Elon Musk Twitter buyout for Dogecoin, you will see that this strategy is not effective.