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How Open Interest affects trading strategy in F&O?

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According to the theory, high open interest at a market top and a dramatic price fall off should be considered bearish. That means all bulls who bought near the top of the market are now in a loss position. Their panic to sell keeps the price action under pressure.

More info :

Open interest, or OI as it is popularly known as, is an important metric monitored by traders who trade in the F&O segment. It tells the number of contracts that have been created in a particular instrument but are yet to be closed (i.e., the number of open positions). So in a way, OI also tells about the liquidity of an instrument.

We have explained the concept of open interest in detail in FYERS School of Stocks. To read, click here41.

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Changes in open interest may confirm price action or act as a warning of a potentially weakening trend. However, Open Interest in any derivative contract cannot exceed the market-wide position limit set by the exchange. A market-wide position limit is the maximum number of open positions allowed in any F&O contract of an underlying security.

A trader can take use Open Interest to read the market trends.