The next trend is the most popular daily trade strategies In the world. It involves buying and holding an asset whose price is rising and short selling an asset whose price is falling.
Strategy is often emphasized with phrases such as “The trend is your friend” And the “Don’t catch a falling knifeThe last statement means that you must Not trying to buy a collapsing asset.
However, there are some strategies claims the opposite, like the one we’ll explore now: vanishing. In this article, we will look at The concept of trend fading and how to use it well.
What is vanishing trading?
The fading The strategy is the same It is the exact opposite of trend following. It’s a contradictory strategy Traders seek to buy an asset whose price is falling And the short the price, the higher the price.
For example, if a stock goes from $10 to $15 within a short period, the vanishing strategy calls for placing a sell trade with the expectation that it will start to decline.
in most cases, Traders who apply trend following The strategy is the same ones trying to vanish it. Their goal is to make money during the current trend and when it starts to reverse.
Related “ How to identify a trend early
The assumptions of strategy fade
The strategy has three important assumptions. First, vanishing traders assume that A The price has moved to an overbought or oversold level.
Traders use technical tools known as oscillators to identify overbought and oversold levels. The most popular oscillators for finding these levels are Random oscillator f relative strength index (RSI).
Secondly, they assume that existing buyers from an asset He will start making profits After an asset goes up sharply in a short period. this is a period When buyers start to exit their positions known as distribution. It is based on the theory that buyers do not hold their trades forever.
Related “ Understand stock market cycles
Third, there is an assumption that current owners from an asset in danger. As such, if this happens, they will start exiting their trades.
How does vanishing trading work?
As mentioned above, the vanishing strategy is a contrarian trading method, where The trader tries to go against the trend. Therefore, in order for it to work, There must be a trend. After identifying an existing trend, the trader works using the strategies described below to take the opposite path.
As we will notice, fades away a Big risk Trading strategy Where the trend can continue for a long time. Also, it is possible that you will get pinched when you are trying to reverse direction.
There are other ways to use the vanishing strategy. For example, suppose a situation where an asset goes up sharply after a company publishes its financial results.
In most cases, it is a The rally will begin in the extended or pre-market hours. With stocks coming in, you assume that gains will be limited. In this case, you can place an opposite trade in the opposite direction.
Vanishing trading strategies and examples
There are many fade trading strategies that you can use profitably. Let’s take a look at some of them.
The news fades
A common fading strategy that you can use is known as The news fades. This is a strategy where a stock or currency pair is involved It jumps or drops sharply after an important news release. An example of common news that pushes stocks up or down sharply is profitsAnd the Mergers and acquisitionsInvestigations and new product launches are Geopolitics.
in most cases, Assets tend to overreact When a major event occurs Then prices tend to stabilize after a short period.
A good example of this is what happens After Russia invaded Ukraine. At that time, it was The Russian ruble collapsed After the Western countries imposed sanctions. As shown below, the USD/RUB subsequently recorded a sharp decline.
Related “ Our complete guide to forex trading
Using Oscillators in the Vanishing Strategy
Another popular vanishing trading strategy is Use oscillators. Oscillators are technical indicators that are used to identify overbought and oversold levels. Some of the most popular oscillators in trading are Random oscillator, relative strength index (RSI), money flow index (MFI), and MACD.
It is said to be a very asset Overbought when the indicator moves above a certain threshold Like 70 in the RSI. It is said to be veryVariable when the cursor moves below specific level. A good example of this is in Netflix stock below.
As shown, the The stock is down more than 76% from its high point. They are oversold, as indicated by the Stochastic Oscillator and the Relative Strength Index (RSI). As such, dull traders took the contrarian route and bought the stock.
Vanishing strategy using chart patterns
Another way to trade the vanishing strategy is using chart patterns. There are many styles that can help you with this. For example, if a bullish trade forms a double top pattern, then there is a There is a high probability that it will start to decline in the near term.
Other popular chart patterns that will help you trade the vanishing strategy are wedgesAnd the Head and shouldersAnd the Triple Summit Among other things. A good example of this is seen in Apple stock below.
Another popular fade strategy is where the gap narrows. This is a trading strategy where you try it Go in the opposite direction of the gap. gaps More common with stocks Since it closes every day of the week.
So, if there is gap downAnd the The trader can decide to buy and vice versa. The theory is that the original probably overreacted and would start to do so Rebalancing soon. A good example of this is shown below.
In this article, we have looked at the concept of a vanishing strategy. We explained what the fade approach is and how it works. Also, we noticed some The most popular trade strategies To be used when applying the strategy.
as you will find, Going in reverse can be a risky approachwhich means that you must apply a stop loss to all of your trades.