When to enter – my favorite system
There are many different ways you can enter a trade with the Fibonacci tools. Now I am going to introduce the safest option which works very well for me for a long time. This is also the option commonly used by many professional traders.
The game plan
The main idea is to buy when the correction ends and there is a breakout. We are looking for a place where there is the best chance to enter at the right moment and into the right direction. The place is a break above recent high in an uptrend or below a recent low in a downtrend.
In theory, it should look like in the picture below:
The game plan is simple:
1. Identify the main trend (you can read the instruction in Part 7). You should know what the main trend is and in which direction you will be looking to enter a trade.
2. Identify the low-high/high-low swing. Find the swing which you will draw the retracement and extension lines for.
3. Wait for the end of the correction to part C. Let other traders play between the retracement lines. Just be ready and wait to enter the position.
4. Wait for the breakout above the high from swing A-B (to go long) or below the low from swing A-B (to go short).
5. Wait until the price moves to the extension line and closes the position at point D
The main difference between a Fibonacci trader and an ordinary trader
It is not complicated. You may have noticed that many other traders are taking positions at breakouts because chances that the move will continue in the main trend direction are the best.
But there is one huge difference between a Fibonacci trader and an ordinary trader. The latter is not sure when he should close the trade. He has opened the position at the right time (at the breakout), but he has no clue where to close it. He has some exit signals, but he is usually late with his exit decision.
A Fibonacci trader is able to get the most part of a move from the moment of the breakout. With the Fibonacci extension tool he can, on many occasions, exit almost exactly at the end of the move (it is not the goal of this strategy, but it will happen to you many times).
In this scenario, you take less risk. When the price closes above a recent high, there is a strong chance there will be a continuation of the up movement.
Your exit point will be on one of the extension lines (more about closing positions in the next part). Your goal is to catch most of the move between 100% and the extension line, so between 100% and 127% or 138.2% or 161.8% etc.
Below there is a 4-hour chart of GBP/USD. From a higher time frame, we know that the main trend is up. There is a deep correction (down to the 61.8% level, C point). At this point, we are still waiting for a breakout. After a while, there is our breakout above point B (recent high). The green field marks out our potential profit zone (it could get even higher), that is everything between point B and the extension lines.
The disadvantage of this scenario is that sometimes the price will explode through a recent high/low and it will be hard to join the movement. Do not worry – it happens sometimes. If you miss it, just wait for another correction. Sooner or later, there will be a strong correction, and maybe a better opportunity to enter the trade.
The key to success here is practice and patience. On some trading days, you may have a couple of good or even very good setups and successful trades.
On other days you might end waiting for a setup the whole day and the market gives you nothing. It is important not to trade because you have to. Just wait and eventually a good trade setup will occur.
In the next example, we can see a 4-hour silver chart. The main trend is up, so we want to buy silver. Finally, we identified the AB swing and waited for a correction which turned out very mild. Our entry point is when the price closes above point B, which, in this case, was very rapid. Take a close look at the chart and notice how fast the move was. In a few hours, the price climbed up to the 161.8% extension line which was strong resistance and the best exit point.
Right afterward, there was a strong selloff. Those using the lagging indicators probably ended with a loss.
Let’s take a look at how this strategy can be used in a downtrend. On the chart below we have a WTI oil daily chart. The trend is down, so we look to take a short position (sell WTI). It is easy to find the AB swing. The correction ended at point C (78% retracement line). We wait for a breakdown below point B where we enter a short position. The move down was very strong and it ended at the 200% extension line.
Where to place the stop loss in the safe scenario?
In this scenario, you place your stop loss not so far away from the entry point. You assume that a break above the last peak should lead to a strong move. If, after a while, the price failed to move forward and comes back to the retracement levels, there is probably something wrong with the trend strength (at least at that moment). You do not want to wait and see if 38.2% or 61.8% will hold as support because the price was there already and you have a position opened at the last peak! What you want to do in this case is closing the position as soon as something goes wrong.
My advice is: when the price moves back below the 23.6% retracement level, close your trade. Of course, do it with the stop-loss order – do not wait and hope for the best.
The stop loss behind 23.6% is only my recommendation, but feel free to change it. Maybe you will want to have a tighter stop? Then try to set your stop loss order behind the 14.6% retracement line (it is also a retracement level, but I have hidden it on my chart).
Setting the stop much wider behind 23.6% is not a good idea in my opinion. We hunt for a strong move forward to the extension line. If the price does not move in that direction, this trade should be closed by our stop-loss order.
Which breakout is correct?
Sometimes you may get confused which breakout is correct. You have probably heard about false breakouts. In order to avoid this, just wait for the close of the candle and check the closing price. If you look at the 1-hour chart, each candle closes after 1 hour and there is another candle on the chart. When the close of the candle is on the other side of the resistance/support line, you have your correct breakout. In the example below, we can look at a breakdown.
The support line is at 1294 points. The first breakdown was false, but the close of that candle was above the support line. Later, there was another breakdown, but this time the close of the candle was below the support line. This was our signal to enter short.
Of course, this confirmation is not 100% accurate, but with this method, you have a better chance of success. It will help you avoid many false breakouts.
The win/loss ratio
The overall win/loss ratio is very good with this method. I know of traders who have won around 70% of their trades with that method! It is a great result! Some traders have had even better results, some have had worse, but it is your main goal as it comes to the /loss ratio.
You do not have to achieve the 70% win ratio to be profitable. A ratio of 50% should give you a positive balance on your account. It is all possible thanks to tight stop losses. You risk little and you are likely to gain more. Some trades will be closed at the 127% extension line with a small profit. But as you will see, some of them may last to the 161.8% extension or even longer! It is a good risk/reward proportion!
The advanced guide to fibonacci trading - parts:PART 1. INTRODUCTION
Basic information about Fibonacci numbers and why it is good to know how to use them.
PART 2. THE FIBONACCI RETRACEMENT LEVELS
How they are build and how to draw them to find possible leveles during correction.
PART 3. THE FIBONACCI PROJECTIONS
How to predict where is the best place to exit trade - Fibonacci Extension and Expansion will be helpful here.
PART 4. THE FIBONACCI CONVERGENCE
Learn what convergence is and how to spot it.
PART 5. WHEN TO ENTER A TRADE – A SAFE SCENARIO
Here we put knowledge into practice - you will learn a safe way of opening positions.
PART 6. WHEN TO ENTER – A RISKIER SCENARIO
Little bit riskier scenario of opening trades where possible profit is bigger.
PART 7. WHEN TO EXIT A TRADE
Closing trade is very important, but where is the best place? This should help you to find the best place to exit.
PART 8. MY TEMPLATE
Few examples of different templates you can use in Metatrader software.
PART 9. A FEW IMPORTANT THINGS YOU SHOULD KNOW
How to define trend, the importance of the higher time frame and how to trade the news with Fibonacci tools.
PART 10. FIBONACCI AND PIVOT POINTS
How to combine Fibonacci tools and pivot points.
PART 11. MONEY MANAGEMENT
Proper money management is very important - without it you will be loosing money fast.
PART 12. MORE EXAMPLES OF TRADES
More exapmles where we put together knowledge from guide.
13. THE “HOW-TO” ARTICLES
Few helpful articles about installing templates and using Fibonacci tools.