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Chapter 10, Part IX. Using Fibonacci for placing orders. Page 6

Discussion in 'Complete Trading Education- Forex Military School' started by Sive Morten, Dec 17, 2013.

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  1. Sive Morten

    Sive Morten Special Consultant to the FPA

    Aug 28, 2009
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    Ok, I see you’ve tired a bit, so here is the last material for today:

    Placing your stop beyond the opposite extreme of tradable swing

    As you see from the name, this method assumes stop placing not just past some Fib level, but past of initial swing extreme:


    This method demands more responsibility and has its own advantages and disadvantages. The major disadvantage and greater responsibility stands for greater risk, because your stop stands now much farther from your entry point. Hence, if you’re wrong, then your loss in pips terms will be much greater – this forces you to trade with lower volume to accomplish risk management strategy. If you will not do that – you can get a really big loss, or even totally destroy your trading account.

    Also, you should coordinate the stop placement with your profit objective. If your potential profit, say, 50 pips and potential loss due stop placement 80 pips – then, this is bad risk/reward ratio and it is better to skip this trade. Always keep this in mind.

    From the other side, placing a farther stop gives more breathing room to the market and you will not need to worry about possible W&R at some level. Only if market will totally destroy the current swing, that you have hoped should continue – then it will tell you, that you’re probably wrong and market has reversed in the opposite direction. But this method of placing your stop should be used with caution. Here are my thoughts about it:

    1. In fact, it is better to place stops not just past swing high or low, but somewhere between 0.886 Fib level and extreme, i.e. inside the swing but close to extreme. The reason for that as follows. If the market makers usually clear stops around 0.382 and 0.618, they do so all the more around swing high or low – because this is favorite public areas to place stops. That’s why, if the market will break the 0.886 Fib level – the probability of clearing stops at the swing high/low becomes extremely high.

    2. If some Fib extension target stands above/below swing high/low - it’s better to place stop in a view of it:


    For example, if you’ve Sell in situation as on left picture – you should place stop above the possible 0.618 Fib extension target against you, because if it will happen – highs at “B” point will not hold. And in opposite, if you sell in situation as on right picture – then the placing stop just above the “B” point seems logical – if bears are still in charge, then, market should not take out the highs at “B”. But following our 1st point – it is usually better to place the stop somewhere above the 0.618 extension target from the one side and below the “B” point from the other – somewhere between the 0.886 Fib resistance and “B” point.

    3. This method is more reliable if the context for entering the market lays in a higher time frame. For instance, assume that this price action on the pictures above happens on an hourly chart and the reason, i.e. the major signal why you want to sell lays on daily time frame. Then, possibly it is better to place stops past the extremes – this will allow the market room to breathe in the higher time frame structure.
    Pipruit: Thanks a lot for the images, Commander – they help much. If I’ve understood correctly 0.382 and 0.618 Fib resistances are from the “BC” down swing?​

    Commander in Pips: Yes, that’s right.
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