Forex Fading Strategy Explained

The Forex Fading strategy is considered to be one of the most riskiest forex trading strategies and in principle works contrary to the forex basics, where in the trader trades against the current market trends. In a forex fading strategy, the trader sells when the price is rising and buys when the price is falling. Or to illustrate this further, forex fading is when a trader buys on a dip or when the trend is moving aggressively in the upward direction and sells during the price rallies or when the price is falling.

Forex fading strategy is very volatile and unless the trader is risk tolerant, using such a strategy could seem disastrous, to say the least. Forex fading strategy requires a good knowledge of the technical analysis, however it would still make it risky. However, considering the risk factor involved, forex fading strategy is also rewarding in the same promotions. The price targets start to set when the buyers take positions against the markets.

Fading strategy is most commonly applied to the stock markets but more and more forex traders apply this strategy to the currency markets as well. The primary reason being that prices in the currency markets can get very volatile, ie. rise and fall in a few seconds.

Forex fading strategy is when a trader trades less during price rallies and trades more during price rise.

Definition of Fading

The term comes from stock market trading. Fading is refered to the process when stocks are sold during increase of market trends. The fading strategy is built upon a commonly known scenario stocks are usually overbought during an upward trend. In such a case, the early buyers are eager to pull out from the profits at a time when the buyers are yet to buy the stocks.

Fading in forex trading can be both beneficial as well as risky. While on one hand there is a huge potential to make big profits, there is risk involved in the same proportion where the trader is at a risk of losing their investments. Market prices are based upon the buyers reactions, so in order for a market to act efficiently, the market prices need to be in tandem with the demand price. In the event this happens, it is refered to as the market equilibrium.

Example of Forex Fading

The concept invovles buying during a price drop and to go long during price rallies. This is a volatile strategy but at the same provides the potential to make short term profits from the markets.

Most trading strategies in forex find their basis on the breakouts principle. Breakouts in forex happens whenever the price moves out of an established trading range or trend. The price extremes usually come with the default support/resistance levels. A violation of these levels constitutes a breakout. Breakouts, although popular are not very reliable. While there are inconclusive studies on forex breakouts, the truth is that many breakouts are unsuccsessfull, in most cases in the initial periods.

Traders who do now wish to rely on breakouts make use of forex fading strategy. Whenever the price goes through high or low cycle, it can get complicated to forecast if the price will continue or reverse in its trend. Virtually most forex strategies that are based on divergence tend to hope for a false breakout. Price makes new highs or lows, but the indicators used to analyze this just doesn’t follow, thus creating divergence.

Forex fading strategy is no different and as with any other strategy strategy, the trader needs to develop rules for entry, targets and stop losses. A simple and effective method to use in forex fading, is the single reversal candlestick patterns IF it happens exactly at on the breakout levels. This could be hammers, doji, etc.. Such candlestick formations display a common long shadow or wick characteristic in relation to the total size of the candlestick body.

Prices tend to move in the same direction of the potential breakout, bit often do not maintain the required momentum. Therefore by the end of time period in the chart (which is usually 5 mins) the price eventually loses a big chunk of the advance. Time period applies to the chart time frame in use. If the price happens to go through the support and resistance levels, there is a possible breakout. However that very candlestick closes in on a reversal pattern therefore potentially will not progress further, which makes the conditions ripe for forex fade strategy.

Forex Fading Strategy – Is it right for you?

If you are trading the forex markets, then forex fading strategy is definitely worth exploring at some point in time. Forex Fading strategy can be risky, but profitable at the same time. The Forex fading strategy is based on the assumption such as – overbought stock, buyers’ fear, and eagerness of those who bought early to take the profits. This usually takes place after a certain asset goes up rapidly.

Forex fading strategy has been used by forex traders since a long time. There are quite a few success stories associated with traders who have used the forex fading strategy. However, traders still hesitate to adopt the forex fading strategy due to the huge risks involved. As a forex trader, it is important to diversify your forex trading strategies. While forex fading poses some big risks, the potential rewards that comes out of it makes it well worth for forex traders to atleast try out the forex fading strategy.