Fib Retracement Trading

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.

You enter the market with 1/4 lot (25,000 units) at 1.2300 just like before. If the prices continue to rise just like before, you can still profit from that move by gradually adding to the partial position to target the exit of 1.2400. Now, suppose the price doesn't rise.

Instead, soon you find the price to be at 1.2262 which comes out to be the 38.2% Fib retracement level. You enter the market again at this 38.2% Fibonacci Retracement Level with an additional ¼ lot (25,000 units). Your cost now reduces to 1.2281.

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.

But let's assume, this does not happen and the retracement continues. When it reaches the 61.8% Fib Retracement Level, you again enter the market with an additional ½ lot (50,000) units. Your cost of entry now declines to 1.2259 from 1.2300. If the prices simply rallies back from this point back to your original price level, you will still be profitable.

Use the 76.1% Fibonacci Retracement Level to put the protective stop for the whole trade at 1.2220 as you think that the retracement will continue. Your risk is now only 39 pips.

If the price rallies up from this point, you can take profit at the 138.2% Fibonacci Projection Level that is 1.2338. After that you can use a trailing stop to continue in the trade to maximize profits from your trade. In case, you take profit at 1.2338, the reward will be 79 points. This gives you a good reward to risk ratio of 2:1.

Using Fib Levels as flexible support and resistance zones can help you manage your trades in a much better manner and you can still profit in whatever direction the market moves.

About the Author:
Mr. Ahmad Hassam has done Masters from Harvard University. Learn this powerful Fibonacci Retracement Method FREE that pulls 500+ pips per trade. Get these 3 Swing Trading Systems FREE.

Article Originally Published On: http://www.articlesnatch.com

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