There are two types of traders out there. Those that like to ride the wave of a good trend, hoping to catch a winner that just continues all year long, and then those that like to bet against the trend. The goal is to find something you think is over bought (or over sold) and try to time the reversal. This is sometimes referred to as "fading a move" If you find yourself to be a contrarian and like to fade moves the question will come up, When do I fade the move?, and what do I look for? Today we will give you some examples of when to fade the move and when to let it go.
When to fade: The main thing you want to look for is that the most recent move is some kind of exhaustion of the current trend. If a stock is up 20% for the year, in a consistent up trend, but then in the last 2 weeks has popped another 15%, one could assume that the stock is exhausting itself, and a temporary top is near. Imagine if you ran for 20 minutes and then sprinted for the last 15. You would be quite tired after this and at the very minimum be ready for a break. This can be an opportune time to start to fade a stock.
When to let it go: Now as you can imagine, we are first going to skip any move that has just started. For instance, lets say a stock has been pulling back for a while and suddenly has a large gap higher (maybe due to an earnings announcement). This would be perceived as the start of a move and many would feel that more is coming. Let's avoid those.
The next thing we want to skip is a new breakout. While breakouts can, and do fail from time to time it is best not to make a career out of fading a new breakout. Again, many are taught that this is an opportune time to enter and you will likely be fighting an uphill battle.
Now, we are not all bred with the contrarian mindset, but if you are now you have some tips to help you along the way.