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Trading Breakouts With Fibonacci Projection Levels

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Trading Breakouts With Fibonacci Projection Levels Powered By Docstoc
					Most breakouts tend to fail. It is impossible to know which breakout will succeed and
which breakout will fail. But you have to be in it to win it. As a trend trader, you have
to take every trade. However, using Fibonacci can optimize your few wins and
minimize many losses.

When you spot the breakout candle, enter the market with half of your trade size. If
the price continues in your favor as you had anticipated add 1/4th of the trade size at
138.2% of the initial move. And if the momentum continues in the direction that you
had wanted and anticipated, add the final 1/4th of the trade size at 162.8% of the
move.

In nutshell, you will be using Fibonacci Projection Levels, you will carefully increase
position size as the price action continues in your favor. Let's make it clear with an
example. Suppose you are trading the EURUSD pair. Suppose the length of the
breakout candle is 100 pips and it closes on the high of 1.2300. You intend to trade
one standard lots (100,000 units).

Enter the market with half lot (50,000 units) at 1.2300. Your stop loss will be at the
38.2 Fibonacci Retracement Level which comes out to be close to 40 pips below the
1.2300 entry ( 1.2260). If the price retraces to this level, the case for the momentum
based trade becomes weak and the probability of success diminished. If the price
makes a retracement, you lose 40 points. Since, you intended to trade only one lot,
you lose in reality only 20 pips.

If the price continues to trend in the direction favoring you, you will add 1/4 lot
(25,000 units) more at 1.2338 level. This comes to be equal to 138.2% Fibonacci
Projection Level. Your average price comes out to be 1.2312. You can now tighten the
stop to 1.2298 level. You net loss in case of price making the retracement is 20 pips.

Now, if the price continues to move in the direction that you want, you can add the
final 1/4 lot at 1.2363 which is the 162.8% Fib Projection Level. So, your average
cost now stands at 1.2325. If the price continues to move in the direction that favors
you and reaches the target of 1.2400, your reward will be 75 pips and your risk will be
25 pips. Giving you an excellent reward to risk ratio of 3:1.

This approach minimizes risk by committing only half of the capital at the beginning
of the trade. By using Fibonacci Projection Levels, you gradually add 50% more
capital that slightly increases the cost from 1.2300 to 1.2325 while at the same time
confirming the breakout making the trade more likely to become profitable.

				
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posted:1/26/2011
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