What does Open Interest mean?

Open Interest is the total number of outstanding contracts held by market participants at the end of the day. Alternatively, it is the total number of futures contracts that have not yet been exercised (squared off) or expired.

Open interest indicates the trend in the F&O market and measures the flow of money into the futures market. The open interest position represents the increase or decrease in the number of contracts for a day, and it is shown as a positive or negative number.

Calculation of Open Interest:
Each trade completed on the exchange has an impact upon the level of open interest for that day. There a three possibilities -
 

1. One new buyer, one new seller (both parties initiating a new position) - open interest will increase by one contract
2. One old buyer, one old seller (both parties are closing an existing/old position) - open interest will decline by one contract
3. One old buyer, one new buyer (old trader passing off his position to a new trader) - open interest remains unchanged

Increasing open interest means that new money is flowing into the marketplace. The result will be continuation of present trend (up, down or sideways). 

Declining open interest means that market is liquidating and implies prevailing price trend is coming to an end.