1. Trading Tip: When to Fade a Correction
The key to any strategy is to be able to put it into practice in real time. We all know that trading rarely operates like a textbook so it is important to understand the logic behind a strategy and why it works so you will know when to employ it. I call this common sense approach and you will see why as I explain when you should fade a correction.
The Strategy
You will be hard-pressed to find this in a trading book or course as this trading tip comes from my many years of experience trading in the forex market.
Simply put it is better to fade a correction or counter-trend move that takes place early in a session (i.e. European or NY session) than one that occurs later in the day, One reason is the market is better able to absorb flows earlier in a session when there is full liquidity and participation. In other words, the trend is not likely to reverse unless key technical levels are taken out. Unless this occurs, buyers are likely to be found below the market in an uptrend and sellers are likely to step in above the market in a downtrend.
Here is the logic: Once a correction runs out of steam and the weak longs or shorts taken with the prevailing trend (i.e. longs in an uptrend or shorts in a downtrend) are squeezed out, the market has less capacity to absorb fresh buying or selling, as the case may be, with the existing trend. This is why you often see the market snap back in the direction of the trend after a correction runs out of steam. It is also why looking to fade an early in the session correction tends to be a high-odds trading strategy. .By fade I mean looking for levels to buy when an uptrend corrects lower or sell when the downtrend corrects higher. .
On the other hand, a retracement that occurs later in the day, especially in the NY session, is more difficult to fade as the market has less capacity to absorb the flows and fresh buyers or sellers are less likely to emerge. In this case, those looking to fade a correction should be prepared to hold the trade into the next trading day.
Summary:
Early in the session correction => Look to fade the move => Expect a snapback.
Late in the day retracements => harder to fade unless you plan to hold the position into the next trading day.
As with any trading pattern, the overall picture needs to be taken into account and whether key technical levels and/or indicators have been violated that would change the risk. As long as this does not occur, corrections that take place early in a session offer trading opportunities for the reasons explained above.
This is a strategy you can put into action as you understand the logic behind why and under what conditions it should work.
Here is a real-time illustration of when to fade a correction and when to avoid it.
.
