Fading Trading Strategy - Fading Trading

It's an opposing trading strategy, where traders trade against the prevailing trend. Fading trading strategy is risky and usually best if done by professional traders, who understands technical analytics well and are experienced in interpreting charts. Note: "Fading the market" is not for everyone.

Forex traders will often use Fading Strategy in light of major economic news releases.

KEY TAKEAWAYS

• Traders who use a Fading trading strategy are selling when the prices are rising and buying when it is falling.
• Forex traders will often use Fading Strategy in light of major economic news releases.
• A fading strategy is most effective when there is a significant amount of volatility in the market, as there will be potentially profitable corrections.

Fading Trading Strategy

Traders who use a Fading trading strategy are selling when the prices are rising and buying when it is falling. The idea behind the fading strategy is that the market has already taken into account all the information (the direction and the trend is already in full swing), and the later stages of the trend are mainly supported by those traders who react more slowly, which will increase the likelihood of a trend reversal. But before we start, if you are new to Forex trading, you can start with the basics, “What is Forex trading”.

For example, contrarian investors might buy stocks after a company advises shareholders and the public that its earnings results will not meet analyst expectations. Contrarian investors explain their decision to buy with the market overreach.

Fading is generally a volatile strategy that will generate significant short-term profits. This does not require complex analysis, but the risk of a trend continuation is always present.

Fade Trade Meaning

Fading trading strategy means that a trader buys when the market is selling and sells when the market is buying. Even though there is an opportunity for large short-term profits with a fade strategy, a successful fade trader will not engage in this strategy blindly. There is a real risk to suffer big loss if a trend continues, but if a fade trader successfully identifies when a security is moving too far from its true value, the trader will capitalise on the reversal.

A fading strategy is most effective when there is a significant amount of volatility in the market, as there will be potentially profitable corrections. When using this strategy traders will wait for key statistics data release; earnings reports, interest rates or sales projections. Fading trading strategy can be used on stocks, though it is more suitable for Forex markets, because after reports release there are significant currency fluctuations.

Hypothetical Example

Let's say the publication of trade data by country X is better than expected. This will push the value of Country X's currency up against the US dollar and investors will begin to move capital in the hope of a rising currency X. As investors invest in Currency X, algorithmic traders will follow suit. As the price continues to rise, retail or “regular” traders will see this trend and start investing as they determine the potential profit.

At this stage, the fading trader will find that while part of this increase in the value of currency X is based on the release of positive economic data, the other part is based solely on the increase in demand and that the market is invariably correcting itself in accordance with the positive economic data. While the price rallies, the fading trader will short X currency and profit from a possible downward correction.

Bottom Line on Fading Trading Strategy

Novice traders should avoid fading trading strategies and perhaps explore alternative strategies. Using this strategy involves a lot of risk and requires the help of an expert. This includes the risk of loss as well as opportunity costs. Traders should carefully consider their financial situation and tolerance to risk before taking large fade positions. Implementation of risk management is important as well, so to sum up - proper research and risk analysis is a cornerstone for a successful fading strategy.