Fading overlaps

We have seen how we fading overlaps and scalping bars are viable ways of trading chops and trends respectively. Almost all price action is derived from these forces working at various strengths at different points of time in the market.

This is why buying the first tail of a trend move such as close of b3 is a viable entry and also why you should expect traders to buy below large dojis (b11) and sell above them.

At first glance, there seems to be a simple principle to fade overlaps: be liberal with your stop and conservative with your target. For example, when I tried to fade b11 high on the close of b17, my stop was too tight (5t) and while my first target of 20t was filled, my runner was taken out at breakeven.

This implies higher risk for smaller profit and this is something traders generally try to avoid. A second option is to fade only the second overlap (b33 instead of b30). However, this will occasionally make you miss a large move (b38 fade) or stop you out (b54 fade).

Taking swing trades on a fade setup with low risk and high reward is still an area of research at this point. For example, today a short at close of b33 with a stop above it would be such an entry.