To understand where to enter to make profits it is important to place your stop loss carefully. You can never enter a trade only relying on Fibonacci levels and not knowing where to exit. Let us discuss the methods to set the stops.
There are two methods to do it-
- Place Stop before the preceding Fibonacci level:
You must place your stop ahead the 50.0% level if you intend to enter the trade at the 38.2% Fib level. If you think that the 50.0% will dominate, then place your stop before the 61.8% level.
Let us now discuss the technique in details with a 4-hour EUR/USD chart.
If you have started trading at the 50.0%, then place your stop order just before the 61.8% Fibonacci level.
The reason to do so is that you may believe that the 50.0% level might grip as a resistance point. And thus, if the price rise beyond this point, your trade will be disqualified. Therefore, the complication completely lies on how is your entry. It shows that you are quite certain that the support or resistance area will influence when you set a stop just before the following Fibonacci retracement level.
The market may rise, hit your stop and follow your direction. This might happen for quite a time, therefore, be sure you limit your losses as fast as possible and run the trend. This type of stop placement is only good for short term intraday trades.
- Place Stop Past Recent Swing High or Swing Low:
Now, if you place your stop before the current Swing High or Swing Low. For instance, when you are in a long position and the price is in an uptrend, place the stop loss below the recent Swing Low which serve as a potential support level.
Similarly, when you are in a short position and the price is in a downtrend, place the stop loss just above the Swing High which serve as a potential resistance level. This technique of placing stop loss will help you to keep going with your trade according to your will.
The market price when exceeds the Swing High or Swing Low, it indicates the correct place of the reversal of the trend. This means your set up of the trade is null and void.
Setting larger stop losses is a better option in the long run and you can assimilate scaling in technique as well. You may face huge losses with a larger stop if you do not regulate your position size carefully.
Also, if you trade in the same position size, you can also face huge losses, notably if you enter in one of the previous Fibonacci levels. If you have a wide stop which is disproportionate to your probable reward, it may rise few unwanted reward to risk ratios.
Now the question arises, which one of the two is a better technique.
In order to pick a good stop loss point, combine the Fibonacci retracement tool with support and resistance, trend lines and candlesticks to find a better entry. these tools will help you to induce your analyzing potential.
Try to not to blindly trust on the Fibonacci levels as support and resistance points on the ground for stop loss placement.