Fibonacci Trading Techniques To Improve Your Strategy
I won’t teach you how to use Fibonacci trading tools to analyse the market or be a Fibonacci expert analyst in this section.
Instead, I will teach you how to use them and take advantage of them in your trading.
Because in the end…
Being a good analyst is different from being a good trader.
Now, how you take advantage of the Fibonacci trading tools boils down to two things:
- Entry and exit triggers
- Scaling out of your trade
- Scaling into your trade
Let me explain…
Fibonacci trading – Entries and exits on a trending market
When timing your entries in an existing trend…
You can consider waiting for the price to make a valid candle close below 38.2%.
The price closed below 38.2% at GBPUSD daily timeframe:
Then wait for the price to close back above 38.2% as your entry trigger.
The price closed above 38.2% at GBPUSD daily timeframe:
If you’re wondering, you can apply the same concept with the 61.8% level.
But here’s the principle behind it…
You are looking to capture false breakouts, and you’re using the Fibonacci retracement tool as a way for you to enter them objectively!
Okay, so how about exits? How do you set your stop loss and where to take profits?
Don’t worry, I’ll show you.
So, assuming you entered a false break at the 61.8% level…
You can consider placing your stop loss below the next Fibonacci level, which is the 78.6%
78.6% initial stop loss at XAGUSD daily timeframe:
And take profits before the nearest swing high (or the 100%) as you want to exit the trade before potential selling pressure kicks in.
Take profit area at XAGUSD daily timeframe:
Now, what if the price is making parabolic trending moves?
Parabolic trend on USDTRY 8-hour timeframe:
As you can see, it’s barely touching any of the “golden” ratios; what should you do?
Enter the breakout, and use the Fibonacci extension tool to time your entries before 161.8%
Breakout setup on USDTRY 8-hour timeframe:
At this point…
I’ve only shared how to use Fibonacci trading tools on trending markets.
So how about ranging markets?
Fibonacci trading – Entries and exits on a range market
Like what I taught you a while ago, you want the price to close below the support area.
Range market on GBPCHF daily timeframe:
Then enter the trade when the price closes back above the area of support.
Range market entry at GBPCHF daily timeframe:
In this case, you can see that we are using price action to compliment the Fibonacci trading tool.
Pretty powerful, am I right?
Finally, you can consider taking your profits at the Fibonacci retracement 88.6% level.
88.6% take profit at GBPCHF daily timeframe:
Again, what’s the principle behind it?
Why should we take profits at 88.6%? Why not at resistance itself?
You see, trading on range markets can be difficult.
It can contract, expand, and make false breakouts.
Here’s what I mean…
Of course, we take advantage of the false breakout to enter our trades!
But it pays to take profits before potential sellers (or a potential contraction) come in.
Fibonacci trading – Scaling out of your trade
Scaling in or out of your trades is somewhat of an advanced topic.
These trade management techniques on your arsenal can single-handedly improve your trading psychology, decrease your risk, and potentially increase your rewards.
So with that said, let’s go back to our previous example where you enter a pullback on the 61.8% reversal with a 1% risk per trade.
61.8% pullback setup on Sugar daily timeframe:
If you’re a conservative type of trader but at the same time, you’re willing to wait a little longer to take profits…
You can partially take your profits once the price reaches the previous high then move your stop loss to breakeven.
Moved stop loss to breakeven on Sugar daily timeframe:
So, what will you do with the rest of the position?
Simple, we use the Fibonacci extension tool and consider taking your profits at the 123.6% level.
123.6% take profit level on Sugar daily timeframe:
What about scaling in?
Fibonacci trading – Scaling into your trade
First, let’s look at a trading setup that you should be familiar with already.
38.2% pullback setup on USDCNH daily timeframe:
What’s the difference now?
The setup is still the same, but instead of risking 1% per trade…
If your stop loss is hit, you’d be risking 0.5% risk per trade.
You trade with a smaller size!
Now, why would you want to do that, you may ask?
Imagine you’re dating someone…
If you give your 100% to that special someone at the early stage in dating and that person didn’t end up being the one, how would you feel?
Devastated, of course, it sucks!
But if you give a fraction of your effort to “test the waters” and see if this person is interested…
If it doesn’t work out, it would feel less painful because not much is invested.
It’s the same with this technique!
You want to make sure that the market is interested in you first by risking small…
Then eventually scale into your trade by risking another 0.5% once it closes and makes a valid breakout!
Scale in on USDCNH daily timeframe:
Instead of using the Fibonacci extension to have fixed profits, I suggest you use a trailing stop loss such as the 50-period moving average.
50-period moving average trailing stop loss on USDCNH daily timeframe:
Because it wouldn’t make sense to have fixed target profits now that things have worked out between you and the market.
Sounds fantastic, right?
With that said, let’s do a quick recap on what you’ve learned today…
When used properly, the Fibonacci retracement and extension could be decisive in adding objectivity to your trading decisions.
But regardless of what you’ve learned today…
Always make sure to backtest some of these trading concepts to the point that you’ve owned the knowledge because it’s your trading journey, after all!
So here’s what I want to know…
Have you tried other Fibonacci tools out there?
How do you use Fibonacci in your trading?
Let me know in the comments below, and I’d love to learn from you as well.
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