Thursday, June 20, 2013

Fibonacci retracements - another tool in the belt

I've been spending the last week practising Fibonacci retracements. I've ignored Fibonacci levels and Elliot Wave theory, thinking they were too subjective to use, but I've been surprised by how well Fibs are respected when used in conjunction with other technical tools like trend lines, support / resistance and candlestick patterns.
This was a trade I did not long ago on the USDCHF 5M chart. I plotted the Fib retracement levels from the most recent major swing low and swing high. From my own observations, you'll very likely see the end of a retracement, and resumption of the trend, within the 61.8% and 31.2% levels.
I also saw that a resistance level had previously been formed around 0.92700. The 200EMA showed a bullish bias. The bullish candle that formed after price touched resistance & Fib levels told me that price was ready to move up. This confluence of technical factors indicated a good opportunity to go long.
I took profit as price reached the previous swing high and began slowing down. All the while I was trailing my stop loss, moving it to breakeven once price was halfway towards my profit target. This is a type of trade that either succeeds, or you get out quickly at minimal cost. We're not hanging around for a second retracement of a similar magnitude as the first, as this would mean the trend is breaking and our chances of finishing in profit is diminished greatly.
Below is a snapshot of my trade. You might have to click on it to zoom in.

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