Hello and welcome to another edition of the bulls vs the bears. Last time we learnt How to use Fibonacci Extensions to Rack up Profits. This week we will be looking at how to pair the Fibonacci tool with a stop loss to protect your trading account from going up in flames. Basically you will be using the Fibonacci tool to place a stop loss so your trading account does not go up in flames.
It’s really exciting entering a trade and racking a chunk of profits. But you do need to know where to place a stop loss. You can just make your entry on Fibonacci levels being clueless as to how to head for the exits when the market turns south on you. Failure to get a clue could cost you your forex trading account, not to mention you blaming Fibonacci for your troubles.
So here is what we are going to do. To equip you for the day when the market does a U-Turn I will show you how to set a stop loss using those Fibonacci levels. Oh by the way, if you feel your stop loss knowledge is a little stale look up How To Place A Stop Loss To A Tee. If you don’t well, you will be pulling your hair throughout this lesson.So First Off:
Place Your Stop Loss Above First Fibonacci Level
The first thing you need to do is place your stop loss just above the first Fibonacci level. If the plan is to make your entry just above the 38.2 level, then it makes sense to place your stop loss beyond the 50.0% level.. If you feel like “hmmm…I think the 50.0 level will hold just fine”, you put your stop loss beyond the 61.8% level. You can apply this technique for any level, depending on the ongoing price action of course.
Let’s look at the price action on the EUR?USD pair
In case you put in a sell order at at the 50.0 level, you gently slot in your stop just beyond the 61.8 % level. You do this believing that the 50.0% level will hold the fort at the resistance level. Such that if the bulls surged past this point, it will render your trading initial trading strategy null and void.
However, and this is a big however. It’s dependent on you making a flawless trade entry. Anything less, and your trade and your account will be history. You have to be super confident that the support or resistance level will hold the fort. Because Fibonacci analysis is not rocket science. Because, like the title of my second installment suggests, Fibonacci retracements can do a 360 on you if you don’t get it right. So watch out.
Some of you are wondering “Hmmm…. what should we expect?” For starters the bulls will overrun the bears and head for the hills. They will then smash your stop loss and head in your direction. And then you will start pulling your hair out saying”What the heck have I done?” Just make sure you limit your losing trades to a minimum and focus on winning as many trades as possible.
The whole idea behind the stop loss is to decide on how much money you can afford to lose. This way when it happens you don’t cry over spilt milk. You move on to the next trade.
Next up is:
Place Stop Loss Past Recent Swing High OR Swing Low
If you want err a little further on the side of caution, you can set your stop loss past the most Swing High or Swing Low. When you want to trade long(buy) in an uptrend just gently place your stop loss just below the latest Swing Low which most likely will act as a likely support level.
On the flip side if you want to trade short(sell) in a downtrend place your stop loss just above the Swing High. The Swing High plays the role of the resistance level. This strategy should give your trade more oxygen and increase the chances of the trade swinging in your favour. Let’s take another look at the price action the EUR/USD pair.
As you can see both the Swing Low and the Swing High are labelled with roundish sea blue. Now if the price were to breeze past either the Swing High or Swing Low, it can only mean one thing:Get ready for a trend reversal.
It also nullifies your trade setup which makes it too late for you to jump back in. If you value your trading account I suggest that you don’t even think about trying it. I guess the question burning on everybody’s mind is:
Is There A Better Way To Pick A Good Stop Loss Point?
Well, let me put it this way. it will be very unwise to rely on the Fibonacci tool alone. Like I said it earlier, it can do a nasty 36o on you. However, an assortment of tools such as support and resistance levels, trend lines, and candlesticks will go a long way in helping you find the perfect stop loss point. You shouldn’t rely on Fibonacci retracement levels alone to help you place your stop loss. That would be suicidal.
Stop loss placement is not etched in stone. But with the help of multiple tools you can tweak your odds – not to mention give your self a safer exit point. Even more important, you give your trade more room to breathe and a better risk-to-reward trade.
That’s a wrap for ”How to Pair Fibonacci Tool With Stop Loss To Protect Your Trading Account From Going Up In Flames ”. I hope you all enjoyed the Fibonacci series. I know I did. Like I indicated at the beginning of this series, I’m not an indicators fan. But the Fibonacci is the one tool I’d vouch for because of its ability to help you visualize your trades.
However, you do not want to use the Fibonacci in isolation. You will get burned instantly. You will be better served combining the Fibonacci with multiple tools such as support and resistance levels, trend lines, and candlesticks. These tool combinations will help you find the entry and stop loss points that you so desire.
Til next time take care.
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