What is a Fade
Fade refers to a contrarian investment strategy used to trade against the prevailing trend. "Fading the market" is typically high risk and requires the trader not to be risk-averse. A trader who fades would sell when a price is rising and buy when it's falling. The premise behind a fade strategy is that the market has already factored in all information.
Fade may also refer to the failure of a dealer to honor a quote when a customer or another dealer wants to trade. For example, if a better bid is posted on another exchange for a security and a market maker is unwilling or unable to match it for a client order, the market maker may offer to trade with the other market maker (with the better price). The market maker offering the better price must accept the offer and trade at the price offered or adjust the bid price.
BREAKING DOWN Fade
An example of a fade strategy would include buying on a dip in price and selling when prices rally. Fading is typically a volatile strategy, but one which offers the potential for significant short-term gains. It requires little in the way of complicated analysis, but the risk that trend continues is always present. A company's fundamentals or price action, or a combination of the two may be faded. For instance, an investor may buy a stock after a profit warning because he or she believes the market has overreacted. Investors who use fade strategies, often get referred to as "contrarian investors.” (For more, see: Rich Profits: How Contrarian Investors are Winning.)
Fading Economic News
Fading economic data is a popular forex strategy. Each week, a global economic calendar lists important economic events, such as interest rate announcements, employment data, economic activity reports and central bank speeches. Traders who fade the economic news trade in the opposite direction of the number released. For example, if the monthly nonfarm payrolls report beats economists' expectations, a trader would sell U.S. dollar pairs, such as the USD/JPY and USD/CHF, and buy pairs such as the EUR/USD and GBP/USD.
It is prudent to wait at least 15 minutes after a news release before entering a trade. This allows time for the larger players in the market to digest the news but still provides ample opportunity to capture the bulk of the trend if the news is faded. Volatility is typically high for several hours after economic reports are released, so using a wider stop may help to avoid getting whipsawed out of a position. (For further reading, see: How to use the Forex Pure Fade Trade.)