We have now paired the Fibonacci levels with various technical tools to find trading opportunities.
In the previous lesson, we also saw how to place accurate ‘take-profit’ orders to maximise our profits.
But the uses of the Fibonacci levels don’t stop there.
In this lesson, we’ll show you how to set your stop-loss when you decide to use the Fibonacci levels.
Remember stop loss orders?
The little lines that ensure that you don’t explore yourself to the risk of losing all your money on a single order?
Yeah, it’s always good to know where to place them.
If you don’t, you’ll end up blaming the poor Fibonacci, cursing his name in your broken Italian.
The proper placement of the stop-loss order is crucial and so the Fibonacci tool can be a great help to traders in determining appropriate stop-loss levels.
The first method is to place a stop right after going through Fibonacci.
Meaning if you planned to enter at the 38.2% Fibonacci level, then you’d place your stop loss past the 50% Fibonacci level.
If you planned to enter at the 50.0% Fibonacci level, then you’d place your stop loss past the 61.8% Fibonacci level.
If you planned to enter at the 61.6% Fibonacci level, then you’d place your stop loss past the 78.6% Fibonacci level.
And so on.
Pretty straight forward, right?
Let’s take a look at a M30 GBP/USD chart.
If you had shorted at the 38.2% you could have placed your stop loss order just past the 50.0% Fibonacci level.
The reasoning behind this method of setting stops is that you believed that the 38.2% level would hold as a resistance point. Therefore, if price were to rise beyond this point, your trade idea would be invalidated.
But it’s not all unicorns and rainbows.
The problem with this method of setting stops is that it is completely dependent on you having the perfect entry.
Setting a stop just past the next Fibonacci retracement level assumes that you are confident that the support or resistance area will hold. And, as we pointed out earlier, using drawing tools isn’t necessarily science.
You never —really— know. The market might shoot up, hit your stop, and eventually go in your direction.
This is usually when you’d put a sad playlist on and turn the shower on.
We are not saying that this will happen.
But it might.
Only use this type of stop placement method for short-term, intraday trades.
Now, if you like to be a little safer, another way to set your stops would be to place them past the recent Swing High or Swing Low.
For example, when the price is an uptrend and you’re in a long position, you can place a stop loss just below the latest Swing Low which acts as a potential support level.
When the price is in a downtrend and you’re in a short position, you can place a stop loss just above the Swing High which acts as a potential resistance level.
Traders believe that this type of stop loss placement gives your trades more room to breathe and therefore a better chance for the market to move in favour of your trade.
If the prices were to go past the Swing High or Swing Low, it might indicate that a reversal of the trend is already in place. This means that your trade idea or setup is already invalidated and that you’re too late to jump in.
The truth be told, it is completely up to you to decide which method you to go for.
Just remember that neither of the methods is a sure thing and you shouldn’t rely solely on Fibonacci levels as support and resistance points as the basis for your stop-loss placement.
But what both of the methods can do, when combined with other tools, is tilt the odds in your favour, give you a better exit point, more room for your trade to breathe, and possibly a better reward-to-risk ratio trade.
So it’s worth a try, right?