The Fibonacci tool does not only determine support and resistence or help filter out setups that are less desirable, but they also offer a clear and precise method of taking trades.
The Fib tool can be used for discretionary setups (with focus on analysis) or non-discretionary systems (rules based strategies). This post focuses on discretionary trading whereas the next article discusses one of the non-discretionary methods.
When I trade Fibs with discretion I use the Fibonacci tool in 2 different ways when deciding upon entries. The contrast between the 2 might in fact be subtle but important enough to clarify.
(Using the Fibs on the 1 hour charts offers excellent trades with decent sized stop losses)
ENTRY: an entry when using the Fib is very simple and straight forward as it is obviously using the retracement or target levels to determine the entry price. I employ this type of method on the 15, 30 or 60 minute charts and use a stop loss below the bottom (long) or above top (short). More details on stop loss placement will be explained in one of the next articles. On the lower time frames the stop loss size is within a reasonable distance of entry and the trade does not take too long to develop (compared to daily chart). In this scenario the entry is completed via a pending order (buy or sell limit).
TRIGGER: in this case I am waiting for price to reach my desired Fibonacci level BUT I am not entering when price reaches the Fib. Instead I am waiting for price to react (in my anticipated direction) to the Fibonacci level before taking an entry. The best reaction is a candle stick price action confirmation such as for instance engulfing twins at the expected Fib level. Some traders are opposed to waiting for a confirmation as the entry price tends to be worse in comparison with the confirmation, which is true but there are two disctinct advantages of waiting.
NUMBER ONE: Fibonacci levels on a higher time frame are often the most respected but also the most difficult to trade from a practical point of view. Or in other words, the market highly respects the levels but the space between the bottom and the 50 Fib could be enormous on the 4 hour chart and practically impossible for many traders to trade (due to risk management rules and small account sizes). Waiting for a price action reaction enables a trader to use a tighter stop loss for this setup as the recent candle high or low could be employed – although I do go 20-25 pips away from the previous candle.
NUMBER TWO: the 2nd advantage is connected to the fact that the probability of a setup succeeding varies per trade when placing the Fib tool on the charts. If I have too much doubt whether the market will respect the Fib level, then waiting for a reaction solves that issue. This is especially important for traders that have less experience when placing Fibs on the charts, who tend to use the Fib tool too often AND on the incorrect price swing. This is an important method to improve one’s Fib trading when you are just starting out with Fibs.
All in all, the diference between a trigger and an entry could seem quite small. However, it is worth sacrificing a few pips and getting a slightly worse entry if the probability of the Fib working out is low or average OR if you are relatively new to Fib trading.
Personally I am using Fibs as a trigger anytime when reviewing daily chart or higher as in those cases I am not willing to commit to a Fib trade via a pending order. Then the stops are too large and trades take too long to develop, which means that the capital is stuck and blocking potential new setups.
When analyzing a 4 hour chart or lower, I classify Fibs ether as trigger or entry depending on the probability of each setup. A setup with a good probability deserves a pending order at the Fib level whereas lower probability trades require monitoring followed by a potential market order once a confirmation is seen.
This is the difference between a flat entry and a trigger. More information on trading Fibs discretionarily will follow in the upcoming weeks. Elite CurrenSea also offers a non-discretionary method of trading the Fibs, which will be explained in the article of next week.
Check our ecs.SWAT course and trading system for more information how to use Fibonacci.
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