Fib Projection Levels And Breakout Trading
Breakout trading is profitable but problematic as most breakouts tend to fail. You never know which breakout is succeed and which one will fail. So, how do you trade breakouts? One strategy comprises using the Fibonacci Projection Levels to trade these breakouts. This strategy minimizes your risk in case the breakout fails and maximizes the profit if it succeed.
What you will do is gradually enter the market at the two Fib Projection levels of 138.2% and 162.8%. When you spot the breakout candle and think that the breakout will continue, you can enter the market with half your trade size. When the breakout continues in the direction that you wanted, you can commit another 1/4th of the trade size at the 138.2% Fib Projection Level. If the breakout still continues in the right direction, you can commit the last 1/4th trade size at the 162.8% Fib Level.
Let's use an example to make this Fibonacci Breakout Trading Strategy clear. Suppose, you trade the lucrative EURUSD pair. You spot the breakout candle that is 100 pips in length with the high at 1.2300. You plan to trade this anticipated breakout with one standard lot. You can also trade with two or more lots. The strategy will work as long as you take care of the ratios when entering the position size.
You will enter the market at 1.2300 with 50,000 units or lot. Place the stop loss at the 38.2% Fib Retracement Level in case the price retraces itself. This comes to be 1.2260. If the price retraces itself, you will be out of the trade. But since you have committed only lot, you will only lose 20 pips.
Add lot or 25,000 units when the market reaches the 138.2% Fib Projection Level which comes to be 1.2338. Tighten the stop to 1.2298.
Now, if the price continues to move in the direction that you want, you can add the final 1/4 lot at 1.2363 which is the 162.8% Fib Projection Level. So, your average cost now stands at 1.2325. If the price continues to move in the direction that favors you and reaches the target of 1.2400, your reward will be 75 pips and your risk will be 25 pips. Giving you an excellent reward to risk ratio of 3:1.
This approach minimizes risk by committing only half of the capital at the beginning of the trade. By using Fibonacci Projection Levels, you gradually add 50% more capital that slightly increases the cost from 1.2300 to 1.2325 while at the same time confirming the breakout making the trade more likely to become profitable.
Article Source: FxTradingStock.com
About the Author
Mr. Ahmad Hassam has done Masters from Harvard University. Get these 3 Swing Trading Systems FREE. Master these highly profitable Candlestick Patterns with this FREE 82 page PDF Candlestick Guide.
by: Ahmad Hassam
Total views: 25
Word Count: 420
Date: Thu, 13 Jan 2011
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