Trading Retracements With Fib Levels
In the last article, we discussed how we can use the Fibonacci Projection Levels while trading breakouts. Breakouts tend to fail a lot with the price action retracing itself. Let's discuss the second situation in this article, where the breakout fails and the price action retraces itself. Can we still use Fibonacci Levels in trading a failed breakout. Sure, we can. We will be using Fib Retracement Levels to gradually enter the market this time. Once again, suppose we are trading one standard lot (100,000 units) of EURUSD currency pair. The price rises from 1.2200 to 1.2300 that is 100 pips as before in the last article. But this time, we are not sure about the breakout continuing so we take a more conservative approach.
As in the last article, we will enter a trade at the 1.2300 level with only 25,000 units or quarter of a lot. Now there can be two situations. Either the breakout continues or it fails. If the breakout continues, we can gradually add to your position size as we did in the last article to take profit at our exit target of 1.2400. But let's suppose this time that the breakout fails and the price action falls.
Now, there can be two situations. Either the price bounces off from this Fib Support Level and starts to rise again. In such a case, you can again profit from your 1.2400 target with a better price of 1.2281 instead of 1.2300.
Place the protective stop for the trade at the 76.1% Fib Level which comes out to be 1.2220. Your risk for the whole trade is 39 points.
If the price rallies again, you can take profit at the 138.2% Fib Projection Level which comes out to be 1.2338. Your reward for the trade is 79 points while the risk is 39 points giving you a good reward to risk ratio of 2:1. You can use a trailing stop after the 138.2% Fib Projection Level to gain as many pips as possible while the rally continues.
These two articles demonstrate that by using Fib Levels as flexible support and resistance zones, you can manage your trades in whatever direction the market starts moving. These Fib Levels can help you as a trader to better manage positions by adjusting your position to the market action. What you need to do is to practice these strategies on your demo account and see how well they work before trading live with them.
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
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Date: Sat, 15 Jan 2011
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