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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 here39.
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 : https://www.investopedia.com/articles/technical/02/112002.asp275
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.
