Legendary Hedge Fund manager John Paulson made $20 billion during the economic crisis dubbed the great recession between 2007 and 2009. While many people lost their shirts Paulson aggressively shorted financials through derivative swaps. Paulson effectively made the greatest fade trade ever. He sold at the top while markets were still moving up, which in our previous article we frowned at. However, he had fundamental analysis telling him that the value was continuing to deteriorate for the banks so he put on his trade and waited until the price followed. He was right and the price moved down hard netting him massive gains.

Another grade fade trade example comes from David Tepper of Appaloosa Management. He believed that in when prices were near their all time lows in March, 2008 that people were scared beyond reasonable measure and that prices were very tempting. He purchased large amounts of financials and amassed $2 billion in a very short time. Again this was more of a fundamental fade trade, but both men went against the general market consensus and were handsomely rewarded.

Mark Fisher commodities shark and author of the Logical Trader had a term for the market consensus. He called it, “the retail bus people.” He said if you put on a trade and nothing happens then anyone in the world has had time to get on that trade. If everyone is in the same trade, how can it make any money? Fisher claims that the bus people are the masses and the masses are always wrong. This would lead credibility to the fade and breakout trades. When both of these trades are taken they usually are going against conventional wisdom and human nature. Thus, having a much greater chance of profitability.

Currently Paulson has accumulated a large stake in gold. With gold just below its all time highs this would fit perfectly into the breakout strategy. Paulson is evidence of a trader using both strategies. If gold were to have a large retracement there would lead one to consider fading the move. However, at this point gold has never looked strong and although it is well over $1,000 the momentum is to the upside and that is the trade position to be in.

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