Fading the move is a contrarian trading strategy where you bet against the current price direction. When most traders are buying, you sell. When they are selling, you buy. This approach capitalizes on the tendency of markets to overreact in the short term and then revert toward fair value.
What Does Fade the Move Mean?
To fade a move means to trade in the opposite direction of the current momentum. If a stock has spiked higher, you short it expecting a pullback. If it has crashed lower, you buy expecting a bounce. The strategy relies on the principle that extreme moves tend to correct.
The core concept: Markets often overshoot in both directions due to emotional trading, algorithmic momentum, and news overreaction. Faders profit by waiting for these overshoots and betting on a return to normalcy.
When to Fade vs When to Follow
Not every move should be faded. Understanding market context is crucial:
Good Conditions for Fading
- Range-bound markets: When price oscillates between support and resistance
- Overextended moves: Price far from moving averages on high RSI readings
- News overreaction: Extreme moves on minor news that does not change fundamentals
- End of day spikes: Late-day momentum often reverses the next morning
- Low conviction breakouts: Breakouts on low volume often fail
Dangerous Conditions for Fading
- Trend days: When momentum persists all day in one direction
- Breakouts with volume: High-volume breakouts often have follow-through
- Major news events: Earnings beats, FDA approvals, or acquisitions
- Trend beginnings: Early stages of new trends are not good fade candidates
Fade Trade Example
Stock ABC spikes from $50 to $58 in two hours on no news:
- Context: Stock has been range-bound $48-$54 for weeks
- RSI: Reached 85 on hourly chart
- Volume: Elevated but not exceptional
- News: No fundamental catalyst found
- Trade: Short at $57.50 with stop at $59
- Target: $54 (back toward range)
- Outcome: Stock fades to $53 by end of day
Technical Indicators for Fading
Several indicators help identify when moves are exhausted and ready to reverse:
RSI Extremes
RSI readings above 80 or below 20 indicate overbought or oversold conditions. When combined with other factors, these extremes can signal good fade opportunities.
Bollinger Band Extensions
When price closes outside the Bollinger Bands, it suggests an extreme move. Price often pulls back inside the bands, offering a fade opportunity.
Moving Average Distance
When price extends significantly beyond its moving averages, it creates rubber-band tension that often snaps back. Look for price more than 2-3 ATR from the 20-day moving average.
Volume Exhaustion
Climactic volume spikes often mark the end of moves. When volume peaks and price stalls, buyers or sellers may be exhausted.
Multiple confirmation: The best fade setups combine multiple exhaustion signals. RSI extreme plus Bollinger Band extension plus climactic volume is more reliable than any single indicator.
Opening Gap Fades
One of the most common fade setups involves trading against opening gaps:
- Gap up fade: Short stocks that gap up on no news, expecting gap fill
- Gap down fade: Buy stocks that gap down without fundamental reason
- Wait for confirmation: Let the first 15-30 minutes establish direction
- Target the gap fill: Many gaps fill within the same day
Gap Fade Example
Stock XYZ gaps up 4% from $100 to $104 pre-market:
- Check news: No earnings, no press release, no sector news
- Opening action: Stock fails to hold above $104 in first 15 minutes
- Entry: Short at $103.50 when it breaks below opening range
- Stop: $105 above the high of day
- Target: $100-$101 gap fill area
Risk Management for Fading
Fading is inherently riskier than trend following because you are fighting momentum. Strict risk management is essential:
- Small position sizes: Risk less per trade than with trend-following setups
- Tight stops: If momentum continues, exit quickly
- Scale in: Add to the position only if it moves in your favor
- Take quick profits: Do not expect fade trades to become home runs
- Time limits: If the trade does not work quickly, it probably will not work
The Psychology of Fading
Successful fading requires specific psychological traits:
- Contrarian mindset: Comfortable going against the crowd
- Quick decision making: Willing to cut losses immediately when wrong
- No ego: Accept that most traders disagree with your position
- Patience: Wait for truly extreme setups rather than forcing trades
Intraday Fading Strategies
Day traders use several specific fade techniques:
Opening Range Fade
When price spikes in the first 5-15 minutes but fails to hold, fade back toward the opening price.
VWAP Fade
When price extends far from VWAP, it often returns. Fade extended moves back toward VWAP.
HOD/LOD Fade
Fade the first test of high of day or low of day, especially in range-bound conditions.
Analyze Your Fade Trades
Pro Trader Dashboard tracks your counter-trend trades separately, showing your success rate and optimal conditions for fading moves.
Common Fading Mistakes
Avoid these errors that turn fade trades into disasters:
- Fading strong trends: Fighting a clear trend is a losing battle
- Fading breakouts with volume: High-volume breakouts often have legs
- No stop loss: Hoping a move will reverse is not a strategy
- Adding to losers: If the fade is not working, do not double down
- Fading too early: Wait for signs of exhaustion, not just an extended move
- Oversizing: Fade trades should be smaller than trend trades
Combining Fading with Other Strategies
Fading works well as part of a broader trading approach:
- Trend following plus fading: Follow trends on daily charts, fade intraday extremes
- Mean reversion systems: Systematic fading based on statistical extremes
- Options strategies: Sell premium when volatility spikes on overextended moves
Summary
Fading the move is a contrarian strategy that profits from market overreaction. Success requires identifying truly exhausted moves in range-bound or mean-reverting conditions, not fighting genuine trends. Use multiple indicators to confirm exhaustion, maintain strict risk management with small positions and tight stops, and take profits quickly. The best fade setups combine RSI extremes, Bollinger Band extensions, and volume climaxes. Remember that fading is higher risk than trend following, so trade smaller and cut losses fast when the move continues against you.