fading

[reactor]

i've noticed the term being used on this board a few times and it's the main reason why people don't describe their trading system if it is successful.

the only problem i have with accepting this idea is why would any other trader want to try and fade out your system? i maybe wrong here but they will be betting in the opposite direction of movement that you anticipate. what reasoning is behind this unless they think the market is going down? i can't see anything being gained from absorbing someone else's trade, so is fading just scaremonger talk?

the only way fading can work is if you can make the markets move, but then you would be bullying the markets more than you would be trying to fade someone elses system.

my opinion is that fading is a term used by people who's system starts failing. it's not because people are trading against them, but because trending systems don't work when it's not trending.

can someone shed some more light on this topic of fading?

 

[Mr. Charts]

You fade an up trend by selling at resistance = you lose money
QED

 

[ChartMan]

Errrr I'm missing something here.... If I buy at support and sell at resistance, where does " you lose money" fit in?

 

[Mr. Charts]

There are people who will short at previous resistance after a clear up trend before any downturn, thus inviting loss.
I was trying to be pithy for a change rather than using far too many words as I often do ;-)
Sorry to be too obtuse.

 

[reactor]

mr chartman, if everyone knew where your support and resistance lines were and therefore know what action you will take, they can take the opposite position and make the market move the opposite way, taking your money. but this is unlikely as no one individual has that much influence and knowledge about what all the other traders are doing, so the crux of my question is why people believe that fading happens? and more importantly the logic with why it happens?

lets make it clear that when i say fading it means people trying to stop your method/system of trading from working and not when a trend runs out of momentum.

n.b. when mr charts said 'you lose' he was referring to the person that takes on the opposite position at your support and resistance lines in an attempt to fade your system.

 

[warm_machine]

Fading is most common in the fx markets. Often it is used by market players to protect options positions, but of course there are a variety of other reasons why it can take place. If a market is positioned long usd, for example, expecting mkt +ve economic news and on the release the news does turn out to be strong, you may find that some players fade the spike higher, in the expectation that the scope for fresh buying is limited and that this will see the market stall and then reverse sharply as people book profits following the disappointing price action. Positioning and expectations are key if this strategy is to be successful, but all of the major players will have every idea of what the expectations are and how the majority are positioned going into the release.
Fading can also pay dividends when dealing with rumours. In the fx, rumours are often heard and dismissed before knowledge of the rumour hits the equity markets, thus one would expect significant volatility to be generated by such actions. Generally most rumours turn out to be just rumours and fading can be very successful in those cases.

 

[bernie]

The problem can be in the fx market that the major players have to quote decent spreads to get the business. Quite often the market will not have immediate liquidity on very large amounts even in currencies like eur /usd.
Eg if one has to sell 500 mln eur usd and the spread is not too far away quite often they will start buying trying to push thru pivot points and even sometimes resistance levels to obtain a higher price to start selling into.
Its the oldest trick in the book and happens everyday with some very devious and complicated methods of doing it.
Thats whyas a private investor you have to be very careful looking for true breakouts because you will never be privy to tis information unless of course you run a fund etc.

 

[warm_machine]

In my experience there's always someone to either buy or sell size to - someone foolish enough to buy highs and sell lows. It's a question of good contacts and knowing who to pass the parcel to when the music stops. Add that to the knowledge of position and expectation and things become quite lucrative for you.
Regarding dubious price actions, I think that the market isn't concerned with private investors. If you get dodgy quotes, that's probably down to your broker, but as a professional you have a choice of quotes to hit, people to call - you're not concerned by a rogue quote. Even if the player behind the quote does turn out to have a headstart, as I said earlier, there are always people slower than you/not in the know.