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Part IX. Using Fibonacci for placing orders

Mysterious Fibonacci - Forex School

Commander in Pips:
 So, we’ve just studied what retracement and extensions are and how they could be used. Also we’ve passed through sophisticated advanced material that teaches you to pay attention to small details and how to combine multi Fibonacci retracements in your favor. The last lesson that still remains is a placing orders technique using Fibonacci levels –using both retracement as well as extension. Here I also will give you some advanced commentaries, but they will be few, so we don’t need to make separate lesson for those.

Pipruit: Thank you, Commander, especially for the shallow advanced commentaries. I appreciate that.​

A placing orders technique using Fibonacci levels –using both retracement as well as extension - Forex School
Placing an Entry LIMIT Order

Commander in Pips: You’re welcome. So let’s start from orders to enter the trade. Here we will talk only about limit orders and not about stop entry orders, because they apply comparably seldom with Fibonacci entry technique. Actually, there is only one rule for placing entry order – you should place Buy/Sell open order slightly above/below Fib support/resistance level that you intend to use for entering the market. Why? Well, may be it is not so topical for Forex market due to huge liquidity, but it may be reasonable for other markets that possibly you will trade sometime. The reason for such kind of order placement is to get more chance of getting your order filled. Because “at the level” there will be huge competition for order executions, so that some orders will lack filling, others will be filled with slippage (i.e. at worse price) and so on. Placing the entry order behind the level has not make a lot of sense. Although you will get fill at better price – possibly it will happen when this level will be broken by the price action, and instead to get out – you will just get in.

Pipruit: Cool! So, you mean that, if, for example, I want to Buy at 0.382 support level I should place Buy Limit order a bit higher, and if I want to Sell, for instance, from 0.618 Resistance - I should place it a bit lower?​

Commander in Pips: 
That’s right. Look at the chart:

Chart #1 EUR/USD 60 min
EUR/USD 60 min chart - Forex School
Commander in Pips: The same is true for entering Short:

Chart #2 EUR/USD Weekly
EUR/USD Weekly chart - Forex School
Pipruit: I see, and what levels are better for entering the market? How to increase my probability to successfully enter?​

Commander in Pips: First, you should apply different analysis tools – combination Fib levels with trend and other lines, and also candlestick patterns. Later we will learn other tools for that purpose. Second, if we talk purely about Fibonacci tools – for entry it is better to use Agreements, Confluence areas or their combination. Look at the same chart – see, market creates an Agreement with 0.786 Fib resistance, so this level is stronger than just single Fib resistance, hence to enter short from there is safer:

Chart #3 EUR/USD Weekly
Market creates an Agreement with 0.786 Fib resistance, so this level is stronger than just single Fib resistance - Forex School
Commander in Pips: I hope that you remember what Agreement and Confluence are, do you?

Pipruit: Yes, Commander. Besides, we’ve already talked that these areas are stronger, so to use them for entering sounds logical.
Commander in Pips: All right, then. There are another couple of moments that I want to attract your attention to. We also have spoken about it, but in a bit different view:

1. 0.382 and 0.618 levels are well tracking and extremely applied by market makers and investors. So, be ready for Wash & Rinse of these levels and stop licking price action around them. You can take this fact in consideration in three ways:

- Place entry order as usual – before the level, but place stop loss order in view of possible penetration of these levels;

- If you want enter from 0.382 or 0.618 level - Place entry order at 0.5 or 0.786 level due to possibility of Wash&Rinse. Although this could work, this is not so attractive due to possibility to not get filled;

- Enter after Wash&Rinse is fully completed. This is excellent approach to entry technique, but it demands more experience. Also, if the market will not show W&R pattern at all, you may skip a good trade.


2. When the market turns and makes initial swing after changing direction – the first retracement after that is usually deep – at least 0.618. Very often it could be “AB-CD” retracement, rather than just single legged retracement (AB and go…).

Pipruit: So, what technique should be applied?​

Commander in Pips: Well, because you’re still pipruit and newbie to Forex, the best technique for you is first one. But, you should apply a third technique as well to the most recognizable swings – that are obvious and everybody see them. Usually they are daily and higher time frame swings. Like those that are on our weekly chart #2 and 3.

Pipruit: And does some method exist to estimate will W&R appear or not?​

Commander in Pips: There is one, but it doesn’t cover all the possibilities, it just shows the scenario at which the appearance of W&R is probable. But stop licking pattern could appear and without this method. Anyway here is the rule:

If market has upward/downward Fib extension target above/below the Resistance/Support level that you intend to use for enter Short/Long – appearance of stop licking and piercing of this level is very probable. 

Just look at the chart #4:

Chart #4 EUR/USD Weekly
Appearance of stop licking and piercing of this level is very probable - Forex School
Assume, that you still want to enter Short from 0.786 Resistance level at 1.4444. But also you see that market has 1.0 Fib extension target just above it – at 1.4559. So, here is logical to expect appearance of Wash&Rinse. For us it means, that we should enter the market after it will hit 1.0 extension target and not before it. So, we will apply third method for entering.

Pipruit: Commander, that’s amazing! And could this scenario be applied at lower time frames?​

Commander in Pips: Yes, I even say that it has to be. But the difference between the target and level should be used correspondingly. So, here is the difference about 100 pips between target and level. This is not much on weekly time frame. But such difference is absolutely unsuitable on, say, hourly chart. Other words, the difference should look logical in corresponding time frame – target and level should be in relatively tight range.

Pipruit: Yes, this is obvious.​

Commander in Pips: By the way, a bit earlier this has already has happened – look at how the market behaved around 0.618 Fib resistance. Here the market also has 1.0 extension target just above this level – and W&R has appeared…

Chart #5 EUR/USD Weekly
The market has 1.0 extension target just above this level and W&R has appeared - Forex School
Pipruit: Commander, I just can say that this is a goldmine. This gives us a huge advantage compared to other participants. First, we will enter at a better price, second – many traders will decide, that this level has been broken already and will enter Long with placing stops below it. And “Boom” – their stops will be triggered and we will accelerate to the downside, in our favor…just outstanding.​

Commander in Pips: Definitely. By the way, we already have talked about this in general – when we’ve discussed how estimate has a level been broken already or not. In advanced comments to Fib retracement…

Pipruit: Oh, right… I feel, that it sounds familiar to me. Now I remember.

Commander in Pips: Ok, let’s shift to placing exit orders – STOP LOSS.


Placing an Exit Stop Order (STOP LOSS)


Here we will take a look at two ways of placing stop – beyond the next Fib retracement level or beyond the opposite extreme of a tradable swing. These are the most simple of the initial ways to place stop orders. If you want some advanced knowledge – refer to DiNapoli “Trading with DiNapoli Levels” book. It’s worth getting a copy of it.

Placing stop beyond the next Fib retracement level


This technique is simple. Let’s assume that you intend to buy from 0.382 level – then you should place stop below some lower Fib support levels – 0.5; 0.618 or even 0.786. Keep in mind, that although we place entry order above entry level, the stop loss order we place below the Fib level.

Here is how it looks like:


Chart #6 EUR/USD 4-hour
Although we place entry order above entry level, the stop loss order we place below the Fib level - Forex School
Pipruit: Wow! I see a spinning top candle pattern, by the way…​

Commander in Pips: Yep. Sometimes, spinning top with long shadows calls as “High Wave”. But let’s return to our business. I show you the chart even with some advanced tools. Here you can see a great thrust up. So, if you intend to enter long from 0.382 Fib support level – you may do this. Stop loss orders could be placed below 1.4047 or even below 1.3977 area. Anyway it should be placed below the support level and not above it.

Pipruit: And where is better to do this?​

Commander in Pips: And what are your thoughts about it?

Pipruit: Well, I think that I choose a Confluence support. Because if the market is still strong and the bulls are still in charge, then this level should hold.​

Commander in Pips: You’re absolutely right with this. Also – take a look, I’ve marked for you one of swings low in blue circle, that is very close to 1.3977 0.618 Fib support level. If you choose to place stop loss order below this 0.618 support – it will be better to place it below this low at 1.3962 also…

Pipruit: Why?​

Commander in Pips: Because if market will take out this low – it will mean that it totally erase the most recent swing up and this fact in turn, suggest that your initial context for enter long has been destroyed by market price action.

Pipruit: Commander, and is it correct to apply the same rules with Agreements, Confluence levels and W&R patterns to placing stop orders? I mean following these rules:

1. If the market creates an Agreement, then it is safer to place stop beyond this level than just a simple Fib level. The same is true for a Confluence level;

2. If the market shows that a possible extension target is above/below Fib resistance/support area, then we should place stop orders not just above/below this resistance/support level, but above/below the target of extension. Assume that we’ve entered the market according to our rule – by placing “Buy” entry order just above the 0.382 resistance level and placing the stop below 0.618.Our entry order was filled. Then, suddenly we recognize that market shows an extension target slightly below 0.618 level. So, should we move our order below this target or not?​

Commander in Pips: Yes is the answer in both points that you’ve specified. I show you it with simplified line chart:

Placing stop loss safely - Forex School
Assume that we’ve bought around 0.382 and market currently stands at C point. Initially we’ve placed stop loss order just below 0.618 level. But suddenly market starts move down, that allows us estimate 1.0 Fib extension target that appears slightly lower our initial stop. In such circumstances it makes sense to replace stop below D point. Because, market can just slightly penetrate 0.618 Fib support for completing 1.0 target and then continue its move up. It will mean that 0.618 Fib support is still in play and market just accomplished its target, that’s all…

Pipruit: I understand. And can we place order not under the next level, but under the same level? I’m asking, because, for example Confluence levels are strong, may be it will make sense?​

Commander in Pips: Sometimes you may, but better to act in a bit another way:

Assume an initial up thrust and the market turns to downside retracement. You intend to buy from 0.382:

- place the stop loss below major 0.618 support level initially – 1.3977 on chart #6;

- If market will reach Confluence level then there is a high probability that it will show some pullback – temporary or permanent, at least after the first touch;

- When and if it will happen and market starts to pull back from Confluence – you may move your stop loss to the level, just below the lows, that the market has made during the first touch of Confluence.

Logic is simple – if market has turned up finally – you stop will be untouched. If it will break it to the downside - then the Confluence will fail and you will loose much smaller amount of money. Also your initial stop loss will not be hit by possible W&R of Confluence area. Besides, the breaking of Confluence will tell you, that market is not as strong as it seemed… But this is a really advanced technique.

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:

Placing your stop beyond the opposite extreme of tradable swing - Forex School
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:

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

Commander in Pips:

Well almost all that I want to tell you today – just some notes at the end of discussion:

1. Although we’ve studied a powerful tool – how to apply Fibonacci to placing orders – this is just the single tool and no more. Try to not rely solely just on it. Use the combination of different tools to shift the odds in your favor;

2. As we’ve said, Fib levels could fail and they do fail very often. It means that your stops could trigger also often. Sometimes, the market can hit your stop and then turn in your direction. You should not be frustrated by this possibility. Sometimes, you will have to reenter before the market will move in your favor. There are no 100% successful tools in Forex.

3. Fibonacci levels should be apply in context of your possible trade, but not as a single tool for entering. We should not buy or sell blindly, just because this is a Fibonacci support or resistance level.

Comments

Pierre le Roux
7 years ago,
Registered user
Chapt 10, Part IX

Thanks for your Fib lessons. Would like to mention that I have found that using Fib 100 channels are even more usefull when trading on the longer timeframes.
oficiuljuridic
7 years ago,
Registered user
Hello, Mr.Morten,

I write in this forum for the first time, but I must say that I read your weekly analysis and daily update with regularity for a couple of weeks.
I think that Forex Military School is an unique project between forex education sites with a high quality level incomparable with others poor education tutorials.
After I read the last lesson "Using Fibonacci for placing orders", I have a question about a subtle and very useful remark you mentioned in your lesson:
"If the market shows that a possible extension target is above Fib resistance area, then we should place stop orders not just above this resistance level, but above the target of extension."
Regarding this remark I have a diferent example on NZD/USD pair.
On H4 chart it has just formed a bearish butterfly. If I anticipate such a pattern and I have such Agreement between 1.272 Fibo rezistence level and 1.618 extension target, but the extension target is below (and not above) Fibo rezistence level, how should I proceed: I place sell limit order below extension target or I place the entry order below Fibo rezistence level and above extension targhet.
In lesson, your remark was regarding placing stopp loss, but the question is the same even if it is about placing an entry order or a stopp loss order (if I was in a long position I must place SL only above extension target or above 1.272 Fibo rezistence. In the atached chart, of course it is not the case of placing an entry order because the price is very close to 1.272 Fibo level and I can wait until market touch this level and enter with market sell order, but my question is in general for this kind of situations: Agreement in which extension target is acomplished before the price touching the Fibo retracement level. In this situations placing entry orders must take into consideration touching Fibo retracement level also, or only extension target acomplished?
By the way, do you realy think that it is a high probability trade to enter short on NZD/USD on Monday after it is touching 1.272 Fibo rezistence (and placing stop loss above 1.618 Fibo resistence on 1.8510) or it is better to wait untill the pair touching 1.618 Fibo rezistence at 1.85 and only after that to enter short. (taking in consideration the daily trend is bulish and my enter would be against the trend).
Thank you in advance for your answer and for unique service you give us with this excelent trading course.
Best regards.
Sive Morten
7 years ago,
Registered user
> Hello, Mr.Morten,

I write in this forum for the first time, but I must say that I read your weekly analysis and daily update with regularity for a couple of weeks.
I think that Forex Military Sc..

Hi Oficiuljuridic,
Very good questions, but they demand extended answer. Trading harmonic patterns, such as Butterfy is a separate and huge topic to discuss just in answer to your post. Soon FPA will release large chapter, that is dedicated to harmonic patterns trading. I can try to give you answer in general:

1. When we have no position, we want to enter the market in favorable place, right? Hence we should place entry order so, that increase the probability of filling. In your scenario, you should place entry order before 1.272 and stop order above 1.618 of AB=CD.
Of cause you can track the price action in real time, and probably will have a chance to enter better. But this is general approach.
2. Second question is - how tight these 1.272 and 1.618 targets? If they tight, you may treat this as single area, just a one level and place entry order a bit ahead of it, while stop - beyond it.
3. Butterfly could also have a 1.618 target. So, harmonic trading is a bit different topic, but usually recommended to place stop beyond 1.618 Butterfly target if you try to enter from 1.272.
4. Personally, I prefer to see, when market hits Fib extension target, before enter in opposite direction. If market has not reached it for some pips, usually it return later and hit it. I feel uncomfortable to enter short, if some Fib target just above me.

Conclusion: personally, I'll try to enter from 1.272 with stop above 1.618. BTW, check out, where 1.272 Fib extension stands... may be it tighter to 1.272 of Butterfly target...
The one exception is if this stop is too far for you. Then wait and track the market with better enter and tighter stop...

You should wait for chapter, dedicated to harmonic patterns, so you will understand all these stuff much better.
LARFA
7 years ago,
Registered user
Great service--and FREE

Hi Admin -- I am very impressed by your outstanding tutorials - they are just what traders need to get the hang of the indicators, systems, and general information about Forex.

Thank you.

Regards

Larfa
Yangwoo Park
7 years ago,
Registered user
I hardly can believe such well organized, quality information is freely available to all FPA members. Siva and all FPA team members are just fabulous people! I really appreciate it. Thank you so much. Justin from Seoul.
Hamza Samiullah
2 years ago,
Registered user
excellent...

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