Fade Trade
A fade trade is a contrarian trade that bets against a recent price move. The basic idea is that a sharp push can run out of liquidity and energy, so a short term reversal or mean reversion becomes more likely. Fading is common after news spikes, opening gaps, or momentum bursts that attract late buyers or sellers.
Core idea
A fade trade looks for an overextension, then enters in the opposite direction once the move loses momentum. It is not a blind reversal. Most traders wait for proof that the push is stalling, such as a failure to make new highs, a lower high, or a rejection from a known reference level.
Typical setup
- A strong move with wide candles and rising volume.
- Evidence of exhaustion like shrinking range, long wicks, or a failed breakout.
- A trigger that confirms reversal, such as a break of a short term trend line or a lower low after a spike.
- A stop placed beyond the extreme of the move.
- A target aimed at a mean reference like the prior range, VWAP, or a gap fill.
Example
A stock gaps up 5 percent at the open and pushes to a new high in the first 10 minutes. The next two candles are smaller and fail to make higher highs. A trader sells short on a break of the minor swing low, places a stop just above the morning high, and targets a move back to the opening range.
Risks and limits
Fading works poorly in strong trend days, when the catalyst is significant, or when liquidity is thin. A late trend continuation can quickly invalidate the trade. A fade should be sized conservatively because the stop is often close to a sharp extreme.
Practical notes
- Use time of day context. Fades are different on the open than later in the session.
- Confirm with volume, order flow, or a loss of momentum rather than guessing.
- Avoid fading a move that is supported by a fresh fundamental catalyst.
Simple metrics
Traders often track distance from VWAP, distance from the prior close, or an intraday ATR multiple to estimate how stretched the move is.
Practical checklist
- Define the time horizon for Fade Trade and the market context.
- Identify the data inputs you trust, such as price, volume, or schedule dates.
- Write a clear entry and exit rule before committing capital.
- Size the position so a single error does not damage the account.
- Document the result to improve repeatability.
Common pitfalls
- Treating Fade Trade as a standalone signal instead of context.
- Ignoring liquidity, spreads, and execution friction.
- Using a rule on a different timeframe than it was designed for.
- Overfitting a small sample of past examples.
- Assuming the same behavior in abnormal volatility.
Data and measurement
Good analysis starts with consistent data. For Fade Trade, confirm the data source, the time zone, and the sampling frequency. If the concept depends on settlement or schedule dates, align the calendar with the exchange rules. If it depends on price action, consider using adjusted data to handle corporate actions.
Risk management notes
Risk control is essential when applying Fade Trade. Define the maximum loss per trade, the total exposure across related positions, and the conditions that invalidate the idea. A plan for fast exits is useful when markets move sharply.
Variations and related terms
Many traders use Fade Trade alongside broader concepts such as trend analysis, volatility regimes, and liquidity conditions. Similar tools may exist with different names or slightly different definitions, so clear documentation prevents confusion.
Practical checklist
- Define the time horizon for Fade Trade and the market context.
- Identify the data inputs you trust, such as price, volume, or schedule dates.
- Write a clear entry and exit rule before committing capital.
- Size the position so a single error does not damage the account.
- Document the result to improve repeatability.
Common pitfalls
- Treating Fade Trade as a standalone signal instead of context.
- Ignoring liquidity, spreads, and execution friction.
- Using a rule on a different timeframe than it was designed for.
- Overfitting a small sample of past examples.
- Assuming the same behavior in abnormal volatility.
Data and measurement
Good analysis starts with consistent data. For Fade Trade, confirm the data source, the time zone, and the sampling frequency. If the concept depends on settlement or schedule dates, align the calendar with the exchange rules. If it depends on price action, consider using adjusted data to handle corporate actions.
Risk management notes
Risk control is essential when applying Fade Trade. Define the maximum loss per trade, the total exposure across related positions, and the conditions that invalidate the idea. A plan for fast exits is useful when markets move sharply.
Variations and related terms
Many traders use Fade Trade alongside broader concepts such as trend analysis, volatility regimes, and liquidity conditions. Similar tools may exist with different names or slightly different definitions, so clear documentation prevents confusion.