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Thursday, August 20, 2009

The Awesome Fibonacci Road Map

Fortune Favors the Brave

As a Forex trading mentor I have found that teaching students to use Fibonacci retracements and extensions has always proved to be the most difficult aspect of their education. Many do not persevere with it and choose what they consider to be less complicated method’s to enter and exit the market.

The following recent sequence of trades shows the true profit potential of trading Fib’s. The 1.618 and 2.618 Fib extensions are natural profit taking points in the market where there is always a potential for a reversal or correction at these hidden support and resistance areas; and to my mind is therefore a low risk, high reward area to enter a trade.

If we accept that these points are where buyers are taking profits and in order to close their trades are in fact selling the base currency to exit the market; and that this is also the point where sellers are taking their profits and in order to exit their trades are buying the base currency to close their positions.

If we can accept that; then surely it is also an ideal place to reverse our position in addition to closing existing positions.
Chart 1 Click to enlarge

The above chart shows price hitting the 1.618 profit target off our point C which is the .786 Fib retracement. We enter the trade short at the 1.618 profit target price of 1.6663; and immediately price drops about 100 pips, to our previous high in the first 2 hours.

On the next chart we set our new fib range from the high at 1.6663 to our previous low at 1.6423 to establish our new fib 1.618 extensions for the profit target on the sell we just entered.
Chart 2 Click to enlarge


As we can see from chart 2 the market tanked at our new 1.618 fib target at 1.6275 where we closed our position with a 384 pip profit; at which point we reversed or position and entered long in the market. We set our new fib range from 1.6274 to 1.6319 with a profit target of 1.6464.
Chart 3 Click to enlarge

Our profit target is reached at 1.6464 where we had a correction of 59 pips. We closed our long trade at the 1.618 for 186 pips profit and entered a short trade with a 35 pip stop loss. This trade was closed out with a 35 pip profit and a new buy order was entered 10 pips above the previous 1.618 aiming for the 2.618 profit target.

The market rallied and our new order was entered at 1.6474 aiming for 1.6581 with our stop just below the previous low at 1.6404. The target was hit at 1.6581 where we closed our long position for 103 pips profit. We immediately entered the next trade short at the 2.618 profit target.
Chart 4 Click to enlarge

Once again the 2.618 profit target was reached where our short trade was closed and a new long trade was entered. The profit on that trade was 200 pips. As there is no recent high to establish my new A- B range I have gone back to my previous low and used my next high to establish take my new 1.618 target.

This trade produced about 225 pips profit and a new short was entered at the 1,618. Price immediately reversed to the 1.382 fib extension (Purple Fib) approximately 150 pips before a small correction to the current market price.
Chart 5 Click to enlarge

These targets are not coincidence, because the market more often than not hits these points and then reverses.

The price swing from 16273 to 1.6591 was also a .618 fib retracement which was more evidence to trade long off that 2.618 low on chart 4. I also use a very specific sequence to find the correct swings but more often than not the high or low of the previous price swing determines the ultimate 1.618 target. For all the trades off the 1.618 targets I use a 35 pip stop loss.
Chart 6 Click to enlarge

1 comment:

Mike said...

That's a great post, I like how you put info over there, I wanna to use some of those helpful tips in my Forex and Stock Quotes Website , thanks a lot for sharing that with us.