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24# The Fader Trading System

This is an intraday technique and write by Kathty Lien.

The fader strategy is

a variation of the waiting for the real deal strategy. It uses the daily charts

to identify the range-bound environment and the hourly charts to pinpoint

entry levels.

 

Long

1. Locate a currency pair whose 14-period ADX is less than 35. Ideally the ADX should also be trending downward, indicating that the trend is weakening further.

2. Wait for the market to break below the previous day’s low by at least 15 pips.

3. Place an entry order to buy 15 pips above the previous day’s high.

4. After getting filled, place your initial stop no more than 30 pips away.

5. Take profit on the position when prices increase by double your risk,

or 60 pips.

Short

1. Locate a currency pair whose 14-period ADX is less than 35. Ideally

the ADX should also be trending downward, indicating that the trend

is weakening further.


2. Look for a move above the previous day’s high by at least 15 pips.

3. Place an entry order to sell 15 pips below the previous day’s low.

4. Once filled, place the initial protective stop no more than 30 pips above

your entry.

5. Take profits on the position when it runs 60 pips in your favor.

Further Optimization

The false breakout strategy works best when there are no significant economic

data scheduled for release that could trigger sharp unexpected

movements. For example, prices often consolidate ahead of the U.S.

nonfarm payrolls release. Generally speaking, they are consolidating for

a reason and that reason is because the market is undecided and is either

positioned already or wants to wait to react following that release. Either

way, there is a higher likelihood that any breakout on the back of the release

would be a real one and not one that you want to fade. This strategy

works best with currency pairs that are less volatile and have narrower

trading ranges.

Examples

Figure  is an hourly chart of the EUR/USD. Applying the rules just

given, we see that the 14-period ADX dips below 35, at which point we

begin looking for prices to break below the previous day’s low of 1.2166

by 15 pips. Once that occurs, we look for a break back above the previous

day’s high of 1.2254 by 15 pips, at which point we enter into position at

1.2269. The stop is placed 30 pips below the entry price at 1.2239, with the

limit exit order placed 60 pips above the entry at 1.2329. The exit order gets

triggered a few hours later for a total profit of 60 pips with a risk of 30 pips.

Figure 9.18 is an example of the fader trading strategy on the short

side. Applying the rules to the hourly chart of the GBP/USD, we see that the

14-period ADX dips below 35, at which point we begin to look for prices to

break 15 pips above the previous day’s high of 1.8865 or below the previous

day’s low of 1.8760. The break above occurs first, at which time we look for

prices to reverse and break back below the previous day’s low. A few hours

later, the break occurs and we sell 15 pips below the previous day’s low at

1.8745. We then place our stop 30 pips away at 1.8775 with a take profit

order 60 pips lower at 1.8685. The limit exit order gets triggered, and, as

indicated on the chart, the trade was profitable.

 

 

This Strategy Write by kathy Lien “Day Tading and Swing Trading the Currency Market,130-132.)

 

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