The 3 Fade Setups (Part 1)

Key Takeaways
• A setup is simply a combination of elements that come together to create the right conditions
for a trade.

• The first and main ‘fade’ setup that we use is what we call the contextual alignment setup.
This means that the bigger picture and / or intraday context are aligned with a support /
resistance zone in such a way as to give good odds for a tradeable reaction at that zone. In
reality, while we’re separating this into its own specific setup, you want to have contextual
alignment in any trade you take. And this alignment will come from applying the 9 principles of
effective intraday tactics that you learned in a previous session, along with everything else
you’ve learned about reading the market.

• But for the purposes of giving more structure to your trading, we’ve labeled it as its own setup.
This has the added benefit of allowing you to realize that when you have strong contextual
alignment at a good zone (based on all the principles you’ve learned beforehand, along with all
of your other market prep work), you can simply take the trade right there without waiting for
any other confirming indicator or price behavior. The contextual alignment is the setup itself,
and you can use what’s called a “direct lean” to enter on the setup. This just means that you
put your order at the zone, and you ‘lean’ against the zone to enter the trade.

• In terms of where to enter at the zone, this is a personal decision. On the one hand if you enter
at the front edge of the zone, you guarantee that you will get filled on your trade if the price
reaches the zone, but your stop will have to be larger to be beyond the zone. On the other
hand, you can enter in the middle of the zone to have a tighter stop loss (and resulting larger
position size and better reward / risk ratio), but you will end up missing some trades that only
reach the front edge of the zone. There’s no way around this dilemma- it’s just a part of
trading. Personally, in our own trading, we prefer to usually get in on the front edge of the
zone. We’ll definitely do that the more confidence we have in the zone under the given
context. In this way, we’re sacrificing better reward-to-risk to make sure we don’t miss the
trade altogether.

• When you’re trading this kind of setup, we don’t recommend trying to read the price action as
it approaches the zone to decide if you should place your order at the front edge or in the
middle. The reason for this is that you’ll often get a lot of back and forth action (i.e. chop) on
the smallest timeframes at these zones, and there’ll be a large amount of randomness that
you’re trying to read. You’ll often end up making incorrect decisions, and it will only complicate
the process of trading and make it more stressful for you, without much corresponding benefit.

Copyright © 2012 OpenTrader Training, LLC. All rights reserved.

• In terms of stop placement, realize that you shouldn’t have some sort of fixed stop size that
you use (for example 2 points in the S&P). The reason for this is that market volatility is
changing over time, and as we get volatility expansions, the zones are naturally going to get
wider, and you’ll need larger stops. Conversely, as volatility contracts, the zones will get tighter
and you’ll need smaller stops. So base your stops on the zones themselves instead of a fixed
point amount, and this will naturally adjust for volatility for you.

• The better you get at reading the market context and determining the important zones, the
more of these setups you will find, and the more good trades you’ll be able to take. So practice
diligently, and review the Market Framework section with the drills to deepen your
understanding and enhance your skills.

Copyright © 2012 OpenTrader Training, LLC. All rights reserved.