Authored by Ivan Delgado Egea, Head of Market Research at Global Prime Forex.
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Would you like to trade with better precision and understand what are the areas in the chart where the smart money tends to take profits? What if you could utilize a fairly straightforward technical concept to help you be much more accurate in the areas where you collect your hard-earned pips?
One of the key stages in the evolution of a trade and your personal development as a trader is to know when to take profits. If you have been trading long enough, you’ve probably gone through the bitter experience of having to close your trade at break-even or worse yet, at a loss after you missed your take-profit target by a few pips. The reasons that may lead to such a disapponting outcome can vary greatly, but from my personal experience trading the markets and interacting with hundreds if not thousands of traders over the years, one of the main pitfalls I continuously hear has to do with their inability to set logical targets by failing to respect market symmetries.
For many, closing a trade is far more important than opening it. In many respects, there is a lot of truth behind that statement. If you think about it, even a poorly executed trade can evolve into a profitable idea if you exit at the appropriate moment. However, the key question for those not yet mastering what I am about to explain in this tutorial would then go some like this: I am now in, but when and where is it that I have to take the profit? If you can relate to this question in any way, this tutorial will be of benefit for you.
The 100% Fibonacci Projection Target
In this tutorial, I will unveil one of the most overlooked yet most powerful tools you will ever come across to pinpoint areas in the chart where a potential reversal of some type of magnitude (small or large) is likely. The tool I am referring to is the 100% Fibonacci projection. This is a technique widely used by savvy traders to take profits off the table as I will demonstrate in the exercises I’ve prepared for the readership. But before that…
This is not to be confused with the Fibonacci retracement, which tends to determine how far the prices tend to correct before resuming its underlying trend as per market structure. Moreover, even if the concept is similar, you also want to ignore the conventional way of calculating price targets via the Fibonacci extension tool. Unlike the projection technique that I am teaching in this tutorial, the extension tool is applied to one wave of a price move, which is then combined with Fibonacci extension levels such as 61.8%, 100%, 138.2%, 161.8%, 200%, 238.2%, 261.8%. To me, these types of overly complex calculations are not necessary at all and defeat the purpose of keeping things simple and symmetrically relevant.
The power behind this simple 100% Fibonacci projection resides in the symmetry and harmonic relationships of market cycles. By drawing a 100% Fibonacci projection, you can anticipate the area in the chart where some type of pause and potential reversals in price is likely to occur, due to:
- The side in control of the cycle takes profits off the table.
- Counter-trend positions are added by contrarian players.
- These are price points where limit orders are set by market-makers.
The way to draw the projection is by dragging the Fibonacci tool from the latest swing up/down to the breaking point that confirms a new cycle. You will be amazed at the accuracy rate of the 100% Fibonacci projection acting as an initial impenetrable wall as a result of the above rationale.
EUR/USD Case Study: Accuracy Is Out Of Question
We have selected the most recent activity in the EUR/USD (15m), as to guarantee that we don’t cherry-pick the most convenient time to run this case study. I will now demonstrate a multitude of examples and the high accuracy rate that results from properly calculating these key areas in the chart. Remember, the higher the timeframe to calculate your target projections, the more relevant it’s going to be. Ideally, crosschecking two additional timeframes is sufficient (in my approach, I run the analysis on H1, D1, W1).
Out of the 9 projections drawn in the span of 10 days, the results include:
- In 7 occasions, the 100% projection represented the exact level where price turned around or paused before the resumption of the trend.
- In 1 instance, the 100% proj failed to be reached by a few pips (Oct 16)
- In the latest 100% proj on Oct 19, it was the only time that the 100% proj was shrugged off and price continued.
Let’s keep scrolling back the chart of the EUR/USD, so that we don’t leave any stone unturned. In the example shown below, you will be presented with additional calculations of the 100% Fibonacci projection as targets where a reaction is expected by the market participants. Let’s check the outcomes:
I believe it is fair to state that the precision of the 100% Fibonacci projection continues to be quite impressive, wouldn’t you agree?
Out of the 7 projections drawn in the span of 14 days, the results include:
- In 5 occasions, the target was reached almost to the pip.
- In 2 instances, the price got very close but missed the target.
As a caveat to bear in mind. When fundamental-led interferences (high volatility events), the pricing will tend to disrespect these targets if they happen to be nearby. The higher the potential volatility, the less relevant these areas become. As a trader, you must develop enough common sense, discretion and a fair degree of rationale to know when the power of these targets to represent reversal points may be undermined by fundamentals.
Your Turn To Practice & Get Better
I am sure this exercise has the potential to be a powerful lesson for a fair number of traders. If that’s the case, I will be satisfied. In this example, I wanted to illustrate how important it is that you pay attention to these levels. In the majority of cases, you will find at least some temporary support or resistance, and hopefully, you will act accordingly to reward yourself.
Get to practice this exercise on your favorite pairs. The more you do it, the better you will get at picking your profits and improve as a trader.
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