Open Interest vs Volume vs Funding Rate: What They Mean for Your Trades
These three derivatives metrics reveal what leveraged traders are doing. Learn how to read them individually and—more importantly—how to interpret them together.
- Open Interest = outstanding contracts (position count). Volume = trades executed. Funding Rate = cost of holding positions.
- Use them together: Rising OI + rising price = trend conviction. Extreme funding = potential reversal. High volume confirms moves.
- Thrive monitors all three metrics 24/7 and alerts you when patterns like accumulation, distribution, or squeezes form.
See How The Metrics Interact
Click through common market scenarios to see how OI, volume, funding, and price relate:
Smart money building positions
Open Interest
↑ Rising
Volume
● High
Funding Rate
~ Neutral
Price Action
→ Sideways
Large players are accumulating. Rising OI with stable price suggests new positions are being built. Watch for a breakout.
Quick Definitions
Open Interest
The total number of outstanding futures contracts. Increases when new positions open, decreases when positions close.
Volume
The total number of contracts traded in a period. Includes both opening and closing trades. Resets daily.
Funding Rate
Periodic payment between longs and shorts to keep perpetual futures price anchored to spot. Indicates market sentiment.
Open Interest Explained
Open interest (OI) represents the total number of outstanding futures contracts that haven't been settled.It's a measure of money flow and market participation.
Here's how OI changes:
- OI increases: When a new buyer and new seller enter the market (new positions created)
- OI decreases: When an existing long sells to an existing short (both positions closed)
- OI unchanged: When a new buyer takes over an existing long's position (position transferred)
The key insight: OI tells you whether money is entering or leaving the market. Rising OI during a price move suggests conviction—new money backing the direction. Falling OI suggests profit-taking or capitulation—existing positions closing.
How to Read Open Interest
- Rising OI + Rising Price: Bullish. New longs are entering and pushing price up. Trend has conviction.
- Rising OI + Falling Price: Bearish. New shorts are entering and pushing price down. Downtrend has conviction.
- Falling OI + Rising Price: Potentially weak rally. Shorts are closing (covering), not new longs entering. Watch for exhaustion.
- Falling OI + Falling Price: Potentially weak selloff. Longs are closing, not new shorts entering. Watch for a bounce.
Volume Explained
Volume counts the total number of contracts traded during a period. Unlike OI, volume includes both opening and closing trades. It resets at the start of each day (or period you're viewing).
Volume tells you how much activity there is. High volume means high participation—lots of traders are active. Low volume means low participation—the market is quiet.
Volume vs Open Interest: Key Difference
The crucial difference: volume counts trades, OI counts positions.
- If Alice opens a new long and Bob opens a new short: Volume +2, OI +1 (one new contract created)
- If Alice closes her long by selling to Bob (who also closes): Volume +2, OI -1 (one contract closed)
- If Alice sells her long to Charlie (new trader): Volume +2, OI unchanged (position transferred)
This is why you need both metrics. High volume with flat OI means positions are changing hands—could be distribution. High volume with rising OI means new money entering—could be accumulation.
How to Read Volume
- Rising volume + rising price: Strong buying pressure. Bulls are in control.
- Rising volume + falling price: Strong selling pressure. Bears are in control.
- Low volume + any price move: Weak conviction. Move may not sustain.
- Volume spike: Important event. Watch for breakout or reversal.
Funding Rate Explained
Funding rate is a periodic payment exchanged between long and short traders on perpetual futures. It exists to keep the perpetual price close to the spot price.
How it works: Every 8 hours (on most exchanges), either longs pay shorts or shorts pay longs. The direction and amount depends on whether perpetuals are trading above or below spot:
- Perp > Spot (positive funding): Longs pay shorts. Incentivizes shorting to push perp price down.
- Perp < Spot (negative funding): Shorts pay longs. Incentivizes longing to push perp price up.
Funding as Sentiment Indicator
Funding rate reveals market sentiment:
- High positive funding (0.03%+): Market is crowded long. Longs are paying significant fees to hold. Potential for long squeeze.
- High negative funding (-0.03% or lower): Market is crowded short. Shorts are paying to hold. Potential for short squeeze.
- Near-zero funding: Market is balanced. No extreme positioning.
Extreme funding is often contrarian. When everyone is long and paying to be long, there's no one left to buy. When everyone is short and paying to be short, there's no one left to sell. These extremes often precede reversals.
Metrics Side-by-Side
| Open Interest | Volume | Funding Rate | |
|---|---|---|---|
| What it measures | Outstanding positions | Trade activity | Long/short imbalance |
| Resets? | No (cumulative) | Yes (daily) | No (continuous) |
| Tells you | Money entering/exiting | Participation level | Market sentiment |
| Best for | Trend conviction | Confirming moves | Contrarian signals |
| Update frequency | Real-time | Real-time | Every 8 hours |
| Danger sign | Divergence from price | Spike with no follow-through | Extreme readings |
How to Combine All Three Metrics
The real power comes from reading all three together. Here are the most important combinations:
Accumulation Pattern
Scenario: Price is ranging (sideways). OI is steadily rising. Volume is normal to high. Funding is neutral.
Interpretation: Large players are building positions while price consolidates. The neutral funding means there's no extreme positioning yet. Watch for a breakout—the rising OI suggests it will have conviction.
Distribution Pattern
Scenario: Price is rising. OI is falling. Volume is high. Funding is very positive.
Interpretation: Smart money is exiting while retail chases. The falling OI shows positions closing despite rising price. High positive funding shows longs are overcrowded. This often precedes a top.
Short Squeeze Setup
Scenario: Price has been falling. Funding is very negative. OI is elevated. Then price starts rising.
Interpretation: Shorts are crowded (negative funding) and getting squeezed. Rising price forces covering (buying), which pushes price higher, which forces more covering. Squeeze can continue until funding normalizes.
Long Squeeze Setup
Scenario: Price has been rising. Funding is very positive. OI is elevated. Then price starts falling.
Interpretation: Longs are crowded and getting squeezed. Falling price triggers liquidations (selling), which pushes price lower, which triggers more liquidations. Cascade can continue until funding normalizes.
Healthy Trend Continuation
Scenario: Price is trending up. OI is rising. Volume is elevated. Funding is positive but not extreme.
Interpretation: This is what a healthy uptrend looks like. New money is entering (rising OI), activity is high (volume), and longs are willing to pay to hold (moderate funding). Trend likely continues until one of these metrics diverges.
Practical Trading Tips
- Don't trade OI alone: Rising OI doesn't tell you direction. Combine with price action.
- Watch for divergences: Price making new highs while OI falls is a warning sign.
- Respect extreme funding: When funding is >0.05% or <-0.05%, be cautious on that side.
- Volume confirms: Big moves on low volume often fail. Big moves on high volume often continue.
- Context matters: These metrics mean different things in different market regimes.
- Use multiple timeframes: Daily OI trend matters more than hourly fluctuations.
- Set alerts: You can't watch these metrics 24/7. Let technology notify you of significant changes.
Frequently Asked Questions
What is the difference between open interest and volume?
Volume counts all trades executed (buys and sells), while open interest only counts outstanding contracts. Volume resets daily; OI is cumulative. A trade can increase volume without affecting OI (if it's closing a position) or can increase both (if it's opening a new position).
What does high open interest mean?
High open interest means many positions are currently open in the market. This indicates strong interest and potential for volatility. High OI with rising prices suggests bullish conviction; high OI with falling prices suggests bearish conviction.
What does positive funding rate mean?
Positive funding rate means longs pay shorts every funding period (usually 8 hours). This indicates more traders are bullish (long) than bearish (short). Extremely positive funding can be a contrarian sell signal as longs become overcrowded.
What does negative funding rate mean?
Negative funding rate means shorts pay longs. This indicates more traders are bearish than bullish. Extremely negative funding can signal a potential short squeeze as shorts become overcrowded.
How do I use OI and volume together?
Rising OI + rising volume + rising price = strong bullish trend with conviction. Rising OI + rising volume + falling price = strong bearish trend. Falling OI + high volume = positions closing, potential trend exhaustion or reversal.
What is a funding rate flip?
A funding rate flip occurs when funding changes from positive to negative (or vice versa). This indicates a sentiment shift in the derivatives market. Flips from positive to negative suggest bulls are capitulating; negative to positive suggests shorts are covering.
Where can I see open interest and funding rate data?
You can view OI and funding data on exchanges (Binance, Bybit, etc.) or aggregators like Coinglass. Thrive.fi monitors these metrics across multiple exchanges and sends alerts when significant changes occur.
How often does funding rate change?
On most exchanges, funding is exchanged every 8 hours (3 times per day). The rate itself fluctuates based on the price difference between perpetual futures and the spot index price. Rates are typically between -0.1% and +0.1% per period.
Key Takeaways
- 1.Open Interest tells you whether money is entering or exiting the market.
- 2.Volume tells you how much participation is behind a move.
- 3.Funding Rate tells you which side is crowded and paying a premium.
- 4.Together they reveal accumulation, distribution, and squeeze setups before they play out.
- 5.Divergences between these metrics and price are often early warning signs.