To fade or not to trade? (Example: EUR/USD)There is a correction taking place in the US dollar uptrend. Do we trade against the prevailing trend, or sit on our hands and do nothing? To fade or not to trade, that is the question.
On a surface level, the current environment is a trading range - following a long downtrend.
When a strong major trend has been in place for around 3 months - sometimes sooner - sometimes later (we have observed 3 months as a good benchmark) something has to change - either there is a significant correction or the trend reverses.
The challenge lies in distinguishing between the two. Reacting too early risks fighting momentum, while reacting too late means missing an opportunity.
After years of trading, I’ve realised the goal is not to guess – but to follow a structured trading system that tilts the odds in our favor. The system doesn’t work every time of course but it gives you a way to approach the market.
Let me outline now - a system using Fractals & the 30-Week Moving Average to help you decide which way to trade the market
1. Identify the Primary Trend
Use the 30-week moving average (30 WMA) as the trend filter.
Uptrend: Price is consistently above the 30 WMA, and the slope is rising.
Downtrend: Price is consistently below the 30 WMA, and the slope is falling.
A strong trend remains in place as long as price respects the 30 WMA. A violation suggests a shift is possible.
2. Look for Fractal Confirmation of a Shift
In an uptrend, a higher low followed by a higher high confirms continuation.
In a downtrend, a lower high followed by a lower low confirms continuation.
* The key fractal to watch for a potential bottom after a downtrend – is the first higher low after a downtrend correction that made a higher high (potential bottom)
* The key fractal to watch for a potential top after an uptrend – is the first lower high after an uptrend correction that made a lower low (potential reversal)
So, how about what’s happening now?
The weekly chart shows a base has formed at 1.02 in EUR/USD.
Price closed last week right at support-turned-resistance around 1.05.
A ‘higher high’ was formed followed by a ‘higher low’ as demonstrated by the green and red fractals accordingly.
However, the price remains below the 30-week moving average.
We can see the setup better on the daily chart as a shallow downtrend line.
The pattern beneath the trendline is a messy inverse head and shoulders. As such, should the trendline break to the upside it is a bullish signal. And if the trendline holds, it signals the trend is still just consolidating before a continuation lower.
We think there’s a good chance this trendline breaks given the alignment of the weekly fractals.
So fade the downtrend or ignore the move upwards?
To answer that it helps to think about the next step. If the price does break higher, how high is it likely to go? There is resistance at 1.06 from the late November and December peaks. Then the 50% Fibonacci retracement and the 30-week moving average come in around 1.07.
The reason fading a trend has a lower probability of success vs trading with the trend is because there is so much nearby resistance (in the case of trading a bottom).
You can absolutely fade this trend but our experience tells us the price often fails at a nearby resistance level, capping the risk:reward potential on long positions- and simultaneously offering a nice opportunity for short positions.
But - as always - that’s just how the team and I are seeing things, what do you think?
Share your ideas with us - OR - send us a request!
Drop us a comment!
cheers!
Jasper
