The turnover ratio is an advanced derivatives indicator which shows the 24 hour volume of a derivatives contract over its open interest. This provides the ratio of short-term trading and speculation relative to longer-term positions. During volatile periods, turnover tends to increase as traders look to profit on short-term price variations.
Liquidations also tend to spike during volatile periods, thus decreasing open interest and making turnover increase even further. Therefore, turnover ratio is an indicator that can be used to analyze how derivatives traders are reacting and positioning themselves according to market volatility.
Futures Turnover Ratio for Bitcoin (December 25, 2020 contracts)
The turnover ratio is helpful to grasp the investment time horizon amongst futures traders. If the ratio of volume to open interest is high, this points to high short-term trade relative to longer-term positions. This is the case as open interest only accounts for outstanding position while volume measures both the opening and closing of positions.
The turnover ratio is intricately related to a crypto-asset’s volatility, which is why this is overlaid as a dotted line in the indicator. In periods of high volatility such as early September 2020, turnover ratio spikes as there is a simultaneous increase in short-term trading activity and closing of positions. Hence, the turnover ratio is helpful to gauge speculative activity and market positioning in relation to market volatility.