Trading Lesson: The Power of the Fade
09/08/2017 2:51 am EST
The fade can help you think differently from the crowd to achieve success. CBOT veteran Jeff Wecker shares many other ideas for swing trading and day trading. Look for more Trading Lessons every Friday on MoneyShow.com.
No, I’m not talking about Jordan Spieth fading it around the corner on a dog leg right. And no, I’m not talking about fading-in or out on a movie set. I’m talking about how and when to fade popular chart formations and technicals, thereby putting more and larger green numbers on your brokerage statement.
What do we know for sure? Well, we know that the preponderance of retail traders are not making a living trading.
We also know that this same preponderance was taught pretty much the same things like head and shoulders formations, MACD, RSI, Fibonacci, and on and on.
So it stands to reason (since this is a zero sum game) that if 90% of traders are trading off these things and losing, then the 10% who are making all the money must be doing the opposite….that’s the “fade” I’m talking about.
You have to understand that you can’t just do this all the time or randomly. You must pick your spots and then the rewards are large and fast.
Why? Because when a formation fails, there’s a rush to get out, and when you’re on the other side of the trade, the bigger the rush, the bigger and faster your profits.
Some simple examples are a head and shoulders breaking through a neckline and failing; a breakout from a triangle or rectangle that fails, or a breakout from the Ichimoku cloud followed by a failure.
These failures are especially profitable when you know or sense how the market is positioned. Just this week was a pretty good example: the market was definitely short NZD/USD with all the bankers touting the trade and the technicians touting the head and shoulders formations on the weekly charts and the point and figure charts as well.
The obvious sell point was 7180. Well, it hung around 7180 for a while and then Tuesday (Sept. 5) shot up to 7260 taking out all the weak shorts. (Taking out weak shorts or weak longs is a favorite move of the markets….as diabolical as it is).
But those who understood the value of fading got long and made a fast 80 pips. Happens almost every day, the scenario or formation is different but the results are the same.
Another nice part about fading popular concepts is that you never have to predict what a market is going to do. There is no need to have an opinion, which is usually disastrous.
Consequently, I teach my students (or experienced traders that I coach) to trade price action, not their opinions. Not having an opinion and or not trying to figure out what is unknowable, can be a great advantage.
I find that the Far Eastern traders who I work with are most likely to understand this. Why? Well, their cultures understand martial arts where it can be a great advantage to let your opponent make the first move and then you react.
Same thing in trading….let others step forth with their opinions and then you decide whether to go with them or fade them.
As a general rule, you might want to go with a formation when nobody is talking about it and it doesn’t even make sense. And then fade it when for example, when the whole world is talking about the euro going to parity, which of course it never did.
In any case, don’t think you have to lock yourself into a position. Being able to reverse your position on a dime is one of the keys to survival and big profits.
Let’s say I get long on a breakout from an 8-week consolidation; it breaks out but then turns around and heads back into the consolidation. If I reverse from long to short as it goes back through the breakout point, it's normally a great trade. Why? Because, again, the market is probably long and in the rush to get out, they are going to aid my position, and fast.
In summary, I’ve tried here to give you some examples of how you have to think differently from the crowd in order to be a great trader.
We emphasize techniques like this in our international Skype group (open to all) where traders from 10 different countries gather every day to discuss strategies and specific trades. Often, we let others make the first move, then we react. We never have opinions, trade price action only, and are ready to reverse on a dime if we are wrong. It’s a great game!