Here is another way that I use Fibonacci to make entries and place stops. Always remember that Fibonacci is used for support and resistance, not for bias.
As you can see on the chart, I have set up a Fib retracement to measure the decline of the up move from July 21. Let’s assume that the bias has been shifted to dollar strength on this pair, given the current risk-aversion mood off the recent weak economic data and the market’s disappointment in what the Fed decided to do Vis a Vis additional Quantitative Easing.
Yesterday’s candle closed below the 38.2 retrace level, and indication that price will eventually move to the 61.8. With a short bias, the question now becomes where to place an entry and stop. Here are your choices:
- Short entry if price retraces to the 38.2 on 1.5663
- Let price retrace up to some point, then enter short
Keep in mind that the target will be at the 50 level on 1.5560. Since I always want to have at least a 3:1 reward to risk ratio, I need 33 pips as a stop. If I enter at 1.5663, hoping that the 38.2 will hold, my stop will be on 1.5696. As it turns out, the trade gets stopped out before eventually going our way.
Using option 2 will help us avoid this. Here’s how to do it:
Take the daily range of the previous day, which is 235 pips, and multiply it first by .236 and then by .382. This will give us 2 price points where price can retrace to before resuming the downward trajectory. We will then choose one of these levels as a short entry.
For example, 235 x .236 = 55 pips. Adding 55 pips to the previous day’s low gives an entry on 1.5682, which means we are waiting for price to retrace to the 23.6 fib level of the previous day’s range before going short. Since my target is on 1.5560, and I’m looking for 122 pips on this trade (since my target is at the 50 retrace level), my stop will be 41 pips above the entry.
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