Volume and Open Interest as Confirmation
Why Murphy treats volume as a secondary, confirming signal rather than a standalone trading tool — and what open interest adds in futures markets.
Volume — the number of shares or contracts traded in a given period — is introduced not as a standalone signal but explicitly as a secondary indicator that confirms or questions what price action is already suggesting, a role consistent with how it already appeared throughout the reversal and continuation pattern chapters earlier in this course. The general principle Murphy states is that volume should expand in the direction of the prevailing trend and contract on moves against it; when that relationship breaks down — price making new highs on shrinking volume, for instance — it is read as a warning that the move lacks the broad participation needed to sustain itself.
For futures markets specifically, the book adds open interest — the total number of outstanding contracts that have not yet been closed out — as a second confirming measure alongside volume. Rising open interest alongside a price trend suggests new money is entering and supporting that trend; open interest declining while price continues to trend is read as a sign the move is being driven by existing positions unwinding rather than fresh conviction, and is treated as a less durable move.
This chapter functions as a deliberate synthesis point in the book — rather than introducing a new pattern or tool, Murphy is pulling together a thread that has already appeared quietly in every prior chapter (Dow Theory's volume tenet, the role-reversal discussion in the support and resistance chapter, and the confirming-volume requirement in both the reversal and continuation pattern chapters) and stating it explicitly as a standalone principle. The placement is deliberate: having seen volume work in four different specific contexts already, the reader is now positioned to treat it as a general-purpose confirming lens rather than a pattern-specific rule.
| Price action | Volume behavior | Read |
|---|---|---|
| New highs | Expanding volume | Healthy, well-supported advance |
| New highs | Shrinking volume | Warning sign — advance lacks broad participation |
| Pullback within an uptrend | Shrinking volume | Normal, healthy correction |
| Pullback within an uptrend | Expanding volume | Warning sign — selling pressure may be more than a pause |
The recurring practical use of volume across the book is as a discipline against over-trusting a chart shape in isolation. A pattern that looks textbook-perfect on price alone but shows contradictory volume — rising into a topping pattern's final peak, or shrinking on a breakout that should show conviction — is presented as a lower-confidence signal worth waiting on for further confirmation, rather than acted on purely because the shape matches a name from a chart pattern catalog.
The discipline cuts in both directions. Just as contradictory volume should lower confidence in an otherwise textbook pattern, volume that confirms cleanly can reasonably raise confidence in a pattern that is not perfectly textbook-shaped — a head-and-shoulders with a slightly uneven right shoulder but a clean, declining-volume signature is arguably more trustworthy than a geometrically perfect pattern with contradictory volume. Murphy is implicitly arguing that volume, not shape precision, is the better-weighted input when the two disagree.
Volume measures activity but not who is creating that activity — a high-volume day could reflect fresh new positions being opened, or it could equally reflect existing positions being closed out, and volume by itself cannot distinguish between the two. Open interest fills exactly that gap in futures markets, since it only rises when a contract is genuinely new (a new buyer and new seller both entering) and only falls when an existing contract is closed out (an existing holder and existing counterparty both exiting) — giving a trader visibility into whether volume represents fresh conviction or unwinding activity that volume alone leaves ambiguous.
This is why Murphy pairs the two into a small set of standard read-outs: rising price with rising open interest is the most bullish combination (new buyers driving the move), rising price with falling open interest suggests short sellers closing out losing positions rather than genuine new demand, and the mirror-image readings apply on the downside. No single one of these reads is presented as a standalone trading signal — like everything else in this chapter, open interest is one more confirming layer, not a substitute for the price and pattern analysis covered earlier in the course.
- Volume is a secondary, confirming tool, not a standalone signal — it should expand with the trend and contract against it.
- Divergence between price and volume (new highs on shrinking volume, for example) is a warning the move may lack sustaining participation.
- In futures markets, open interest adds a second confirming measure — rising open interest with a trend suggests fresh money, falling open interest suggests existing positions unwinding.
- When shape and volume disagree, Murphy implicitly weights volume more heavily — a slightly imperfect pattern with clean confirming volume is more trustworthy than a geometrically perfect one with contradictory volume.
- Open interest answers a question volume alone cannot: whether activity reflects fresh new positions or existing positions being closed out.