This swing trade fades the traders who chase breakouts. Careful application of this strategy can yield significant results – especially when selling options.
Be sure to stick closely to your stops with this type of system. Failed trades can move swiftly against trend-fading systems.
Amateurs Buy Breakouts, Pros Fade Them
High volume breakouts often, but certainly not always, indicate that all of the bullish participants have all rushed in at the same time and that there may be “no one left to buy”. After these bullish shock events price tends to consolidate and shake out late buyers. High volatility begets low volatility. These repetitive and somewhat predictable characteristics show us that we can’t go long after the crowd and make consistent profits. If this is the case then there must be a reasonable way to fade the crowd and profit from price’s predictable movement during such events. This swing trading strategy guide does just that.
Apply This Swing Trade Strategy Very Carefully
The danger of this trade appears when the “train keeps rolling” and we get run over. For this reason it is imperative that we place hard stop orders for both price and time. This type of trade is the kind that will trap poor-disciplined traders in long and painful losers. Make sure that you do not fall into this category. Place your stops and move on quickly when the market remains intent on its bullishness. Momentum markets can be stubborn and the old saying goes “the markets can remain irrational far longer than you can remain solvent.”
Consider Selling Options
This swing trading strategy is perfect for selling options. When we fade breakouts we are selling short. In some cases shares might not be available to borrow. Selling options solves this problem.
Also, much of an option’s price is determined by volatility, and this trading strategy by its nature sells high volatility. This is perfect for selling options. Calls are at their most expensive (sell high) just after one of these events. As soon as everyone realizes that price isn’t going to the moon right away they tend to get much cheaper (buy low).
Selling “just in the money” naked call options actually carry slightly less risk than selling short a stock out right because of the time decay value and we can still place hard stop market orders to slip out of the trade quickly and artfully as not to get hit by the train.
Volume Spike / Breakout Fade Swing Trading Strategy Guide Rules
- Selecting Stocks to Trade
- Position Entry
- Stop Loss Placement
- Profit Targets and Scaling Out
- Avoid Hot Stock Markets and Very Strong Stocks