After a prolonged fall, traders often rush to buy because an asset looks cheap. After a long rise, they make the opposite mistake and sell too early. These decisions feel logical, but feelings are poor trading signals. They can damage both capital and confidence. Worse, when a genuine reversal finally appears, traders may remain trapped in their old view.
The earlier buyers keep selling into strength, while earlier sellers keep buying every dip. Both groups can lose again.
The better approach is to watch data, especially open interest, or OI. OI shows how many futures or options contracts remain open. When price rises and OI rises, fresh positions are supporting the move, so the trend is generally bullish. When price falls and OI rises, new positions are supporting the decline, so the trend is generally bearish. A oversold RSI, an overbought reading, or a frightening headline does not automatically end a trend. Positions can remain in the market longer than our opinions can remain comfortable.
When a large bullish position is built and OI remains high, traders can consider a buy-on-dips strategy. The same principle applies in a downtrend. If bearish positions remain strong, selling every rally may be more sensible than trying to guess the bottom. The important question is not whether price has moved a long way. It is whether the positions behind that move are still being held.
The warning arrives when OI begins to unwind in large quantities. Position holders may be closing trades, and the existing trend may be losing energy. This can create the conditions for a reversal, but falling OI alone is not a trading signal. Price must confirm the change.