In today forex faq, we have a question from our fellow trader asking about how to use the forex fibonacci trading system in his trade.
Below is the question:
1. HOW FAR SHALL WE STICK TO 2-3% STOP LOSS WHILE WE FOLLOW DAILY CHARTS WITH FIBONACCI STRATEGIES?
2. SUPPOSE AT THE 100% RETRACEMENT ONE IS GOING SHORT ,SHALL WE HAVE STOP LOSS JUST ABOVE 138.2 OR 161.8 . HOW WOULD PLAY? AS YOU KNOW 138.2 EXT. IS NOT AVAILABLE.
The forex fibonacci indicator is a very powerful tool if you know how to make use of it in your trading. This is because the levels on this indicator are considered major support and resistance levels.
For the first question above, you are asking whether we should stick to the 2-3% stop loss if you are trading the daily chart. In fact, the 2 to 3% stop loss is applicable to trading any time frame, it does not matter whether you are trading the daily or hourly chart.
Below is an example of how to trade with the 2-3% stop loss technique
Let says that you have a trading account of $10,000 which means that you are going to risk $200 to $300 in a single trade which is 2-3%.
You see a trading opportunity as the price has hit the fibonacci retracement support level of 0.500. You plan to enter a LONG trade and then place your stop loss at the 0.382 level. At this point, you must check the pips difference between the 0.500 and 0.382 level.
At this point, it will make a difference depending on the time frame you are trading. So let us assume 2 scenarios, one on the daily chart and one on the hourly chart
The pips difference is 80 pips. If you are trading the standard account where 1 pip is equivalent to $10 for EURUSD, you will enter
$300/$800 = 0.375 standard lot
The pips difference will definitely be smaller than the daily chart and let says that the pip difference is 30 pips. Similarly you are trading the standard account where 1 pip is equal to $10, you will then be entering
$300/300 = 1 standard lot
Your lot size will be determined by your stop loss but the overall loss in a particular trade is the same which is $300 irregardless of which time frame you are using.
As for the question 2 of which stop loss to use if going SHORT. There is no 1.382 extension and therefore the next alternative will be the 1.272 extension level.
Your description in your question is pretty weird and therefore I have attached 2 pictures below to try to explain to you.
I assume that when you say that the price has retraced by 100%, the price has actually retrace all the way back to the starting point and this is where you enter a SHORT trade.
I will not enter such a trade as the price has shown that it is going to reverse back up and why will you enter a SHORT trade. However if you really enter a SHORT trade, there will be no fibonacci level for you to rely on as a stop loss.
I assume that you are saying that the price retrace back and then move back up to hit the 1.000 Fibonacci level and you decided to go SHORT.
In this case, you will then use the 1.272 Fibonacci level as a stop loss exit position. But again, I will not enter such a trade because there is a very high chance that the price will break above the 1.000 Fibonacci level to reach out to the extension.
I hope that I have answered your question. In any case if I have misinterpreted your question, do let me know by giving your comment below.