There's great money to be made fading overextended moves, but you need to wait for a price action signal and definitely close the position immediately at a breakout level.
VRUS gapped up Tuesday after a strong uptrend had been underway for days. This can be a great exhaustion fade setup if price either begins dropping at the open or moves up very slightly and stalls. If price begins selling right off the open, you can jump in with low risk, stop loss just above the high. If price stages a small bounce and stalls, you can short a break of the opening range (usually the opening 5 mins), again with the stop loss just above the high. In each of these scenarios, there is overhead resistance to contain your trade (either the opening print off which the selling began, or the opening range high that didn't go much higher than the opening print).
Because VRUS opened and ran immediately with conviction, and the stock is trading at all-time highs, you have no fixed overhead resistance level to work with. Fading is a pure gamble with your risk management the only thing containing your end result.
Neke, putting on a short position when price stalled after the strong opening run and began pulling back slightly is not actually a bad trade because price hit the upper channel line. The problem lies with your lack of a hard stop loss at the key level that would indicate your short position has entered very dangerous waters.
In the case of VRUS that would be a break of the opening range high. That's a with-trend breakout setup. I would guess that over 90% of automated trend-following systems had buy triggers to initiate longs or add to their existing winners at a break of that level. Trend-following retail traders like me can't wait for our buy stops above the high to be triggered so we can let all that programmed trading volume carry us into easy money with low risk (tight stops on breakout trades in case they fail).
What makes the break above 90.00 especially powerful is the fact that on a stock trading at highs with no overhead resistance, technicians determine a level where potential resistance might be found by drawing trend lines. We connect the lows then print a parallel line at the pivot high level between those pivot lows to create a channel that creates an artificial resistance level that might spark some profit-taking when price gets there.
Sure enough, that's exactly where the opening push on VRUS stalled Tuesday. When price didn't sell much off that level and instead consolidated in a narrow range, that's a "screaming buy" breakout setup to the upside.
You can't fight that kind of power except through the use of a protective stop. Consider what your result on VRUS would've been if your stop loss on the short position was 90.00, or if you covered and reversed long @ 90.00.
