Lesson #3 – Using The Fibonacci & 50% Rule To Enter & Exit Pin Bar Price Action Trades
In my previous lesson, I taught you how to enter and exit trades easily, using the daily Pin Bar Break method. I hope you had a great week of demoing this concept and were able to easily include it in your daily trading analysis.
***If you did not take my last lesson, please CLICK HERE before continuing***
Now I am going to introduce you to the Fibonacci Tool, how to effectively use it and how to plan each day of trading ahead with set entries, stop losses and take profits with the 50% rule. Although the Pin Bar Break Method can be very effective, the Risk to Reward can be a big drawback when a trade goes against your favor. Using the Fibonacci 50% method can greatly increase your profits and lower your risk.
What Is The Fibonacci Tool?
The Fibonacci tool is most commonly used among technical traders and is based on key numbers identified by the 13th century mathematician Leonardo Fibonacci. The Fibonacci is created by taking two points (such as a high and low of a daily or weekly chart) and dividing the vertical distance by the ratios 23.6%, 38.2%, 50%, 61.8% and 100%. Horizontal lines are drawn to show key support and resistance levels.
How the ratios are calculated are as follows:
23.6% – Is found by dividing a number in the series that is 3 places to the right
61.8% – Also known as “the golden ratio” is found by dividing a number in the series by the following number
38.2% – Is found by dividing one number in the series by the number that is found 2 places to the right
Although some of these technical terms may not matter to you, at least having a basic understanding of the definition is important in growing your technical trading knowledge, because using the Fibonacci plays a key role in many trading strategies and reversals in price.
So How Do You Use The Fibonacci Tool?
The 50% Entry – Limit & Stop Orders
Just like the Break Method the Fibonacci 50% Method requires you to set a Stop or Limit order. Please refer to the previous lesson on how to enter these.
As you can see, the turquoise horizontal line is at the 50% Fibonacci Retracement line. You want to select this line for optimal results and much like the previous lesson on setting your Stop and Limit orders, you would instead set them at the 50% instead of the break of the nose line.
Sometimes the order may not fill using the 50% method, when the break method would have, but the gain you will achieve from the 50% method will be worth it in your forex account over time.
Setting Your SL and TP Levels
The rules for setting your SL and TP levels are based on previous support and resistance. If you refer to the chart you will see that there is 1 SL level that is red and at the previous support line. There are 4 TP levels that are green and all are based on previous resistance lines for the Long or Buy position.
You would want to set the TP1 and then trail stop by moving your SL to the previous TP level instead of simply TPing at level 1. This will help to ensure you get the maximum potential pips in profit and ultimately your income will reap the benefits.