Trading The Frontside vs The Backside

Case studies from recent action

Of all the trades out there, few are more unforgiving than fading. I’ve seen initial ideas turn into expensive lessons more times than I can count.

The allure is high. It seems to target a deep-seated emotional feeling:

“It’s run too far already,” or “this price is just ridiculous.”

Invariably, it’s not.

It often starts with just a small position—something manageable or curious. But as the stock keeps moving the wrong way, that curiosity snowballs into a painful loss. What once felt overcooked now looks completely insane. A freeze sets in rather than accepting what IS happening.

This is trading the frontside of the move. It is taking a position whilst a prior strong trend is still in place. This current market sell-off has thrown up countless examples of such false dawns on multiple timeframes.

What’s the solution?

Here are some deeper thoughts:

1. Fading does work

Rather than being dogmatic, be open-minded.

For years, I sat around bitching about fading and actors playing that game. I started making money when I decided to actually do the work and build a strategy.

This market is currently a mean reversion market that suits fading.

Being open-minded in trading means accepting that there are multiple strategies to play the market. These may or may not suit your personality, but it is optimal to have no self-limiting beliefs and explore.

→The key is context and nuances.

These could include:

• Timing of the catalyst - fresh news needs more time for the market to process. Going early most likely decreases the probability of the trade.

• Daily chart and multiple legs - the more extended, the better.

• Price and volume - both reaching a crescendo vs prior.

• Size of the gap - new entrants coming in at higher prices create a vacuum below.

Many more variables could be considered when building this play into an actionable system. There are a plethora of examples to reverse engineer over April alone in the ASX.

2. Increase the probability and lower risk by trading the right side of the V

If trading the frontside is fighting the trend before it turns, then trading the backside is initiating a position only AFTER that prior trend has broken and been confirmed by a new upleg.

This concept was made notorious by my mentor, Lance Breitstein, who coined this change in character as the “right side of the V”. See specific details in this excellent post here.

In summary, trading with this new turn or the right side of the V increases expected value because:

1. Trading with a new uptrend increases the probability of being right AND

2. You can now accurately define a real stop to the previous low instead of endlessly adding into the abyss.

As mentioned in my trade write-up, ASX capitulation day on Monday 7th April, the signs of a turn I was looking for included:

• Are SPI futures recovering? Is ES confirming the move? I want to see this bouncing sharply post the US cash close.

• Has there been a price flush and volume capitulation in my stocks? This is a sign that the stops have gone off, which is step 1 for a reversal.

• Step 2 for a reversal is a retest of the open price and holding new highs. I want to see volume into the offer and the break. I want to see a clear change of character. Price has to be back above VWAP.

• Am I making money on the trade? The best trades go from the start. The ones that work need to be added by 10.20/10.30 am. The market is favouring these.

3. Know when to break the rules by trading FRONTSIDE

What is right for Lance is not necessarily right for me or my market.

Contentious take here in Australia- sometimes the edge is all on the open and by being frontside. You often don’t have the luxury of a beautiful “turn” chart for some plays. Meaningful liquidity and price can completely vanish post the open. Sometimes you need to take the risk. The EV would be considerably lower if you:

1) Can’t get the size

2) Can’t get a good price

Of course, there is the risk that the stock that just falls apart post-open. This happens, but maybe you lower your risk IF picking the truly exceptional candidates and being mentally prepared to stop out quickly when wrong.

This is NOT an endorsement to go and fade every match - far from it. The data I have looked at doesn’t support this for my strategy.

The point of the exercise is to identify where I could be doing better within my system, which the examples below illustrate more deeply.

Read on….

Examples from April

There have been countless examples of mean reversion fades over the last few weeks.

I want to try and analyze that sweet spot between frontside and backside. The truth probably lies somewhere in the middle.

17/4/25 Gold Gap-Up Sell

EVN

• Opens at 851 on 537k shares or $4.5m. Instantly trades higher on an additional 500k+ shares. The backside would be a turn back down through 850.

• I vwap in 1/2 size and then double on the confirmed breakdown through 850. The see-it moment was the range breakdown at 10.30 am.

• The stock is so liquid at all price points that being early was not an advantage.

• The context was a prior day strong open to close move in a multi-day rally higher. The new gap created a potential vacuum below, although the volume was not truly climatic.