A Little FIB Goes a Long Way
Apologies for the cheesy title… I’m a father now and I plan to take full advantage of dad humor.
Before I get started, this is purely for educational purposes. Trading any form of currency is risky and using leverage is even more risky. Please keep in mind no strategy will win 100% of the time and the goal is to improve your odds. Do your own research.
Nothing I will say in this article will blow your mind. There are plenty of tutorials on using Fibonacci retracements/extensions. I highly encourage you to peruse youtube and google. Read up on the overall background of the sequence; pretty freaking crazy.
I have been able to use fibs on short time frames to make significant gains. This recent jump in Bitcoin is textbook so I thought I’d take you through my through processes on why I opened up a highly leveraged long. It is still open but currently stands at:
Where To Begin?
Let’s rewind a bit and take a look at the 15 minute chart. You can see price action is operating within a range for quite some time, then we see a jump followed quickly by a dip, putting both a new swing high and swing low in place. Based on the current set-up and using just horizontal support, this could look like a great place to jump in.
Then this happens:
Now, how can we potentially avoid this from happening? Based on the topic, you can guess the answer is Fibonacci.
If we go back to the first swing high/low set-up, we can identify the price point we’d ideally wait for before going long, the 0.382 fib line.
Price never meets that mark and we ultimately get a new swing low. So, we need to re-anchor our fib and then wait for price action to break through 0.382 or make a new low and we start this over again.
It takes some time but eventually price gets to where we want it. Now, fibs shouldn’t be used entirely on their own, but this breakthrough is a good probability for a long.
You Know You Make Me Breakout
This Icon chart embodies the potential pitfalls; false breakouts happen. It is important to use other indicators to avoid these scenarios. RSI, MACD, Volume, roughly 1,000 other indicators that are out there. Because these things will happen, risk management and stop loss placement is even more critical.
Reinventing Your Exit
With every trade, you should most certainly put in place a stop loss to minimize you risk. Especially if you have a newborn and are not getting much sleep. Sometimes you forget you have highly leveraged positions open.
The trick with stop losses is always where to place it? Too loose and you lose more than you should. Too tight and you get get stopped out before a big move. The most basic answer is you should place your stops near key support/resistance lines, but you should give yourself wiggle room. Price makers know this and will stop you out.
Going back to the Bitcoin example. If you take the whole move up, you can get a reasonable stop loss using Fibonacci.
My stop loss will depend on my plan. If I will be at my screen and am able to baby sit, I’ll leave a tighter stop loss but continue to monitor. If it is more of a longer term trade, I’ll probably opt for the looser stop loss to give it time to run. Below are three options based on risk tolerance:
Now, once you’ve entered and things get moving, how can you keep in profit while allowing room for growth? Basically keep moving the FIB tool up as new swing highs are made. Based on the increase, you can see where the stop loss would be moved up to.
Then look what happens. Again, highlighting the art of a stop loss and not necessarily the science.
Target sir?
Typically you’re looking for a move to the 0.618 or 0.786. Once it gets past 0.618, you’ll have to continue to look at price action or other indicators to determine if you want to stay in or out.
If I am able to to watch the price action unfold, I prefer to continually reevaluate and move up my stop losses. This way, I won’t miss out on a potential run.
Baby sitting the trade and analyzing most recent price action in conjunction with the larger picture (initial move down with the move up) will net you the most profit because it is highly unlikely you’ll call the exact top. Below are three different stop loss options, one more profitable then the next.
Rebound
Now, you either took profit or got stopped out, but this train is going to keep on going. Once the swing low is established, we map out and identify another entry point. You could use the original 0.382 and use the most recent swing low as a stop loss. I opted to wait for it to move past the new 0.382
It has taken me much longer than expected to write this, but price does indeed move past the 0.382 and then some. Continuing the use of 38% retracements, you can see how you can move up with the run.
I’ve baby sat this entire trade (with the exception of taking an hour nap) and continued to move my stop loss up. If you have a set point to take out the entire position, you are limited to only that. If you move stop losses up, you could lose out on the top. Dealer’s choice.
Please feel free to share your thoughts or hit me up on Twitter. I love discussing ideas and am always open to different perspectives.
