The Art of the Fade: Trading Against a Stop Hunt
The Black Book of Day Trading Strategies
1,000 complete strategies · 31 chapters · Full trade plans
For most traders, the natural instinct is to trade with the momentum. However, for the seasoned contrarian, the most profitable opportunities can often be found by trading against it. This is the art of the 'fade' – a high-risk, high-reward strategy that involves trading against the initial momentum of a stop hunt.
1. What is Fading?
Fading is a counter-trend trading strategy that involves selling into strength and buying into weakness. It is based on the premise that markets often overreact in the short term and that price will eventually revert to the mean.
2. The Psychology of the Fade
Fading is a psychologically challenging strategy. It requires the trader to go against the herd and to buy when everyone else is selling, and to sell when everyone else is buying. This requires a strong sense of discipline and a deep understanding of market dynamics.
3. Fading a Stop Hunt: The Setup
A stop hunt provides the perfect opportunity for a fade trade.
- Identify a Stop Hunt Zone: The first step is to identify a key level where a stop hunt is likely to occur.
- Wait for the Sweep: As the price sweeps through the level, the fade trader prepares to enter against the move.
- Look for Signs of Exhaustion: The key to a successful fade trade is to identify signs that the initial move is running out of steam. This could be:
- A rapid deceleration in price
- A divergence on an oscillator like the RSI
- A climatic volume spike
- Absorption on the footprint chart
Table 1: Signs of Exhaustion in a Stop Hunt (Sweep of Highs)
| Indicator | Signal | Implication |
|---|---|---|
| Price Action | Decelerating momentum, long upper wick | The buying pressure is waning. |
| RSI | Bearish divergence | The upward momentum is not confirmed by the indicator. |
| Volume | Climatic volume spike | A sign of a blow-off top. |
| Footprint Chart | Absorption of buy orders by sell limit orders | Smart money is selling into the rally. |
4. The Entry and Risk Management
The entry for a fade trade is taken as the price starts to reverse. The stop loss is placed just above the high of the sweep. This is a tight stop, which means that the position size can be larger, leading to a potentially high reward-to-risk ratio.
Formula for Reward-to-Risk Ratio:
RR_Ratio = (Target_Price - Entry_Price) / (Entry_Price - Stop_Loss_Price)
5. The Risks of Fading
Fading is not a strategy for the faint of heart. It is a high-risk strategy that can lead to a series of small losses. The key is to keep the losses small and to wait for the one big winner that will make up for all the losses and more.
- The Trend is Your Friend (Until it Bends): The biggest risk of fading is that you are trading against the trend. If the stop hunt turns into a genuine breakout, a fade trader can suffer a significant loss.
- Catching a Falling Knife: Fading a sharp move can be like trying to catch a falling knife. It is important to wait for clear signs of a reversal before entering.
6. Who Should Fade?
Fading is not a strategy for beginners. It is best suited for experienced traders who have a deep understanding of market dynamics, a strong sense of discipline, and a high tolerance for risk.
For those who can master it, the art of the fade can be a effective tool in their trading arsenal. It is the ultimate expression of contrarianism, and a evidence to the fact that in trading, sometimes the best opportunities are found where no one else is looking.