Fade Stocks - Contrarian Investment Strategy

Fading the Market

Fading the market is the process of taking a position that goes counter to the primary trend of the market.  This trading strategy is a suited for traders that are more open to taking risks and are able to handle the emotional run sometimes associated with going against the market.  Traders fade stocks because the majority of gains are seen in the first part of a move, when everyone else was afraid to take a stand.  This is why fading the market, if timed properly, can prove extremely profitable when calling a market bottom.

Buying the Dip

Buying the Dip is when a stock has a breakdown through a support level and instead of selling this break, the trader takes a long position.  The assumption here is that the stock does not have enough selling pressure to sustain the down move and that an uptrend is imminent.

Selling the Breakout

Market tops can come in many forms, but they are often preceded by a false break to the upside.  Traders will fade these breakouts by looking for clear swing highs where a stock clears the level with light volume and small price action.  This implies that there is little buying pressure and the security will eventually fall back to earth.

Fading Stocks and Technical Analysis

Traders can fade stocks blindly, but it is probably a better idea to have some method of going against the trend.  Technical analysis is a powerful tool to help with this process.  When a stock is selling off, one needs to have a reason to step in front of the bus.  This is where an oscillator like the MACD could provide an early indication that the downtrend is losing steam.  A trader could use this input to take a long position in anticipation of the shift in trend.

Fading Chart Example

Below is an example of Microsoft where the stock was able to clear a multi-year resistance level in late 2007.  A contrarian trader would have used this breakout as an opportunity to short the stock based on the assumption that the move would not hold.  This assumption proved to be correct as the stock sold off from $37 down to $22 in less than a year.

Fade the Breakout
Tim Ord
Ord Oracle

Tim Ord is a technical analyst and expert in the theories of chart analysis using price, volume, and a host of proprietary indicators as a guide...

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