Two major factors a successful trader must look for in any new trade are liquidity and open interest. Liquidity simply allows us to more effectively enter and exit the market; a liquid market is far safer to trade and exposes us to less price volatility. Open interest is an indicator of just how liquid a market is by showing how many open trades are in any particular contract. This can be especially important when trading options, so as not to get stuck in an option with very little activity. Like a roach motel, you will get in but you won’t get out if it’s illiquid. Remember, higher open interest equals better liquidity. More liquidity means a more competitive market, and a more competitive market means more opportunity for you to make money.
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