The benefits of fading in and out of a trade are significant, including reducing risk, obtaining better quality entries and exits, and minimising risk.

Finding the best exit and entries is the goal of every successful trader. However, it is unrealistic to expect the financial markets to always move inline with your expectations. By trading ‘regions’ as apposed to price levels, it is possible to obtain excellent average price levels, without missing out on opportunities, or buying/selling to early.

The concept of fading a trade is to purchase at many different price levels within a region, as opposed to a fixed price. This will require breaking down the trade into smaller lots. Many brokers allow for micro-lot trading, allowing one trade to be divided into many smaller trades. This will help with risk management and positions sizing.

Fading in and out of a trade involves numerous trades across a region.

There are two ways to enter a faded trade.

  • Regular – The trade is divided into equal portions spread across the region
  • Pyramid – The trade has greater weighting at the edge of each region.

With the pyramid trade, the further you enter the trading region the larger the order size becomes, this means the ‘average’ trade price is pulled further out to the edge of the region, as opposed to being in the middle.

So, for example, the further the market moves into the green region (shown above), the larger each buy order becomes. In order to manage risk, stops would be below the green region.

Entering a trade in this manner allows for an improved entry price, and can take advantage of markets which move above and below your entry price. It can also keep the trader calm, as not everything is focused on just one price point.

In addition to obtaining better entry prices, it is also a useful tool to exit a trade more effectively. It is often the case that a market will not reach a target price, or it will go beyond it (giving up valuable potential profit). By fading out of a trade across a region, there is a greater likelihood of at least some of the trade reaching its target and being profitable. This helps manage risk, and reduce pressure on the trader to get everything perfectly correct.

I have found that when trading regions and using the fading technique, I am more likely to let a trade run to it’s full potential, rather than closing too early.

About the author

Trading and Investment

Traded the markets for over 15 years, including Commodities, Bonds, Currencies, Equities, and Indices. I have also worked as a Chartered Financial Planner.
CeMAP, CeFA, DipFA, AdvDipFA, Ba(Hons) Economics, Chartered ALIBF

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