What does 'open interest' indicate in futures markets?

Open interest represents the total number of outstanding contracts in the futures markets, making it a critical indicator of market activity and liquidity. It counts the net total of futures contracts that have not been settled or closed by an opposing transaction, meaning it reflects the total positions that traders currently hold.

When open interest increases, it suggests that new money is entering the market, which can indicate strong interest in price movements, whether up or down. Conversely, if open interest decreases, it may indicate that money is leaving the market, potentially signaling a lack of interest or a decline in trading activity. Open interest is frequently used by traders to gauge market sentiment and the potential strength of price trends, while the other options do not accurately define this crucial concept in futures trading.