Main Capital Monitoring Methodology: On the Use of Open Interest & Long/Short Ratio in the Contract Market

In the “Trading Concepts Cheat Sheet” series, I previously introduced how to use Taker activity to monitor major players’ capital movements. Today, I’ll share another method to analyze the positions of major players: the combined use of Open Interest and Long/Short Ratio.

(Background: Using Bitcoin’s 2021 double top structure as an example: What is “future data leakage” ) Additional context: Why I never trade breakouts: the trap of liquidity hunting by market makers)

Introduction to Open Interest (OI) Let’s start with the concept of Open Interest (OI). In the derivatives market, since there is no actual buying or selling of spot assets, it essentially serves as a pure “betting” venue. If you go long 10,000u in the futures market, it means someone else is shorting 10,000u.

The rules for changes in open interest are as follows: Someone goes long + someone goes short = Open interest increases Someone closes a long + someone closes a short = Open interest decreases Someone goes long + someone closes a long = Open interest unchanged Someone goes short + someone closes a short = Open interest unchanged

To clarify for those unfamiliar: Closing a long position is actually executing a “sell” operation; similarly, closing a short position is actually executing a “buy” operation.

Introduction to Long/Short Ratio The Long/Short Ratio is much simpler: it represents the ratio of “the number of accounts going long” to “the number of accounts going short” in the market.

If the Long/Short Ratio > 1, it means there are more long positions than short positions, and vice versa.

Simply put, the Long/Short Ratio counts the number of accounts. Whether you open a 100u long or a 1,000,000u long, the account count is still +1.

Combined Application By combining the two above, you get a basic method for monitoring major capital.

I’ve made a simple chart for easier understanding. Here is a detailed text explanation:

1⃣ Open Interest increases + Long/Short Ratio decreases If open interest rises sharply in a short period, it indicates large-scale position building. If the long/short ratio drops, it suggests the major players are “going long.” Reason: Their sudden large position eats up lots of limit orders on the orderbook, causing many retail short orders to get filled, making the long/short ratio drop quickly.

2⃣ Open Interest increases + Long/Short Ratio increases Similarly, if open interest rises sharply, it indicates large-scale position building. If the long/short ratio increases, it suggests the major players are “going short.” Reason: Their sudden large position eats up lots of buy limit orders, causing many retail long orders to get filled, making the long/short ratio spike.

3⃣ Open Interest decreases + Long/Short Ratio increases If open interest drops sharply, it indicates large-scale position closing. If the long/short ratio increases, it suggests the major players are “closing long positions.” This is a bit more complex: “Large capital closing longs is equivalent to selling. Because of the size, they eat up lots of retail long orders in the orderbook. Retail longs get passively filled, causing the long/short ratio to rise.”

4⃣ Open Interest decreases + Long/Short Ratio decreases If open interest drops sharply, it indicates large-scale position closing. If the long/short ratio decreases, it suggests the major players are “closing short positions.” Similarly: “Large capital closing shorts is equivalent to buying. Because of the size, they eat up lots of retail short orders in the orderbook. Retail shorts get passively filled, causing the long/short ratio to decrease.”

Notes & Conclusion When analyzing, keep a few key points in mind:

• The long/short ratio is best viewed in terms of relative change rather than absolute value.
• Some coins’ long/short ratios stay at a mean that isn’t 1 most of the time, so using 1 as an anchor is not recommended.
• Large capital doesn’t always mean smart money. While big players are usually stronger, they can still make mistakes, so this method does not guarantee a 100% win rate.
• There’s no absolute “main player” in BTC. Personally, I use this logic less when monitoring BTC because the participants are too diverse and the market cap is too large for any single entity to control BTC directly.
• This method is more suitable for altcoins than BTC. Altcoins have smaller market caps, and the probability of market makers lurking is higher.
• The “ideal scenario” we want to see: Usually, when OI rises sharply, the price has already moved. What we hope to see is “OI slowly rising while price moves sideways,” suggesting that a major player may be accumulating quietly. At that point, use the long/short ratio to pinpoint direction.

That’s today’s sharing. Hope it helps! Thanks for reading.

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