This is a guest post by Ahmad Hassam
In the last article, we discussed how to trade breakouts with Fib Projection Levels. Let’s discuss that breakout situation again. But this time, let’s assume it fails. Again assume that breakout scenario where EURUSD price rise from 1.2200 to 1.2300. But you are less confident that the price action will continue to rise. You still want to take the trade with one standard lot (100,000 units).
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.
You should put the protective stop for the whole trade at 1.2220. This is the 76.1% Fib Retracement Level. Like before, you can move your stops as well. But since you were thinking that the retracement will continue, you placed the stop at 76.1% Fib Level. Since, your cost is now 1.2259, you only risk losing 39 pips.
Now, if the price action again reverses and starts rising, you can take profit favorably at 1.3338. This is the 138.2% Fib Projection Level. The risk for this trade is 39 points and the reward is 79 points giving you an excellent risk to reward ratio of 1:2. You can even use a trailing stop once the price starts rising to continue in the trade as long as possible.
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.