Losing is part of trading. If someone tells you they have 100 pecent winning trades, you know that they are lying. But did you know that you can have 30 percent of your trades profitable and still put money into the bank?
When focusing on the win/loss ratio only, you are missing the very important component of your average wins vs. your average losses. If your average wins (gains) are 20 pips and your average loss is 20 pips, you must have a win/loss ratio of well over 50% to make any real money in trading. Traders should look for trades that offer a 3:1 reward to risk ratio, but 1.5:1 at the bare minimum. If you take higher quality trades, you don’t have to have a very high win/loss ratio to make actual money in trading.
Imagine you lose 7 trades, with an average of 15 pips. Your total loss is 105 pips. However if the 3 winners each average you 90 pips, you still walk away with a net of 165 pips. Not too bad!
You have probably heard about Fibonacci before and that it can be used in trading. I have been hearing about it myself, but I never realized until a short time ago what a magical tool it could be, if used correctly. Now I will show you how it works.
The first set of Fibonacci ratios is used as price retracement levels in trading as possible support and resistance levels.
Price Retracement Levels
0.236, 0.382, 0.500, 0.618, 0.764, 0.86
Price Extension Levels
0, 1.27, 0.382, 0.618, 1.000, 1.27, 1.382, 1.618
In an downtrend, the general idea is to go short at a retracement to a Fibonacci support level. But how does it work? Let’s take a look at some examples.
The first one is AUD/USD daily chart. Metatrader has a great Fibonacci tool. As you can see, after AB there is a 50 percent Fibonacci retracement (C) and from there it goes straight to the 1.27 extension.
But it works on smaller time frames, too. You can scalp on 15 min or 1 hr chart. It works magically on spikes that occur after announcements.
The strategy is simple (but not necessarily easy).
1. You idenify an AB spike, then
2. You pull out your Fibonacci tool, draw the retracement levels
3. wait for the pair to retrace to 0.61, 0.78 or 0.86, these are the highest probability trades
4. Then wait for a reversal candle with stochastic in the appropriate buy or sell zone.
Here is another example, AUD/USD 15 min chart:
You can clearly see the bounce from the .618 level.
Why don’t you pull out some charts on your Metatrader and experiment a little bit. Leave your notes below!
In this system we use the 10 and 20 period moving averages.
Step 1: Waiting for the MA to become sloped and parralel. This is a sign that the trend is strong. A sloped moving average means that the trend is strong and therefore any retracement will probably lead to a continuation in price, and a good trading signal for us to trade.
Step 2: Wait for price to touch the MA area and reverse. This could be from the area between the two moving averages or from either of the lines.
Wait for a reversal candle.
Step 3: Stop loss is placed
• 5 pips below the lowest low of last 4 candles (for long trades)
• 5 pips above the highest high of last 4 candles (for short trades)
Step 4: Exiting the Trade
The trade is closed when the moving average is no longer sloped = is flat.
Here is an example, GBP/USD, 15 minute chart the red (10MA) and blue (20MA) lines:
The ABCD pattern is one of the classic chart patterns which is repeated over and over again. It starts out with an AB leg, then retraces to C to a Fibonacci level of 0.382, 0.500, 0.618, 0.764, 0.86, then it continues to a Fibonacci exension level D – mostly 1.27 or 1.618. As a rule, the deper the retracement, the shallower the D extension will be.
Why is the ABCD Pattern important? It helps identify trading opportunities in any market (forex, stocks, futures, etc.), on any timeframe (intraday, swing, position), and in any market condition (bullish, bearish, or range-bound markets).
Highest probability trade entry is at point C, deep retracement.
Each turning point (A, B, C, and D) represents a significant high or significant low on a price chart. These points define three consecutive price swings and major support or resistance levels. The trend is intact as long as point A is not violated. The moment price violates point A, the likelyhood of a trend reversal significantly increases.
Each pattern leg is typically within a range of 3-13 bars/candles on any given timeframe.
Trading the ABCD pattern
You trade the ABCD with Fibonacci trading.