Open interest is the number of outstanding or unsettled contracts of a particular derivative instrument. It is a metric or data point that helps gauge the traders’ participation in an underlying. Rising Open Interest points at rise in the trading interest in the underlying. This rise could be a result of rise in trading positions by variety of trading participants. The participant may be retail or institutional. High open interest means that there are large number of derivative contracts still open.
In case of futures, if prices rise up and open interest also increases, it suggests that new participants are entering the market despite rising prices, implying an upward or bullish bias.
If prices were to move lower and open interest were to increase, it would be suggestive of a downward bias.
Continuing, if prices were to move lower and open interest were to decrease, it would be suggestive of long liquidation.
Further, if prices were to move higher and open interest lower, implies participants who were sellers are buying back in the instrument.