Eventually I will polish this idea into a trading system you guys can use. I would give you the system straight away but I normally hold trades for weeks and weeks to earn hundreds and hundreds and pips. Most new traders aren’t comfortable with keeping a trade for that long so this walkthrough will help you see the market and so, make an informed decision of when to enter, exit and accept a loss.
Where’s the Market Going Next
Well as traders we normally start our careers we enter in the middle of the action. And with so much happening in the past, we are normally confused as where will the market is going next?
Well the answer is very simple, its either going up or down. It will never stay in a range forever.
Well this is GBPCAD on the 1hr since the start of 2015. I’ve marked with two dotted lines the high and low of 2015. This is what we call the range. The pair will definitely break to one side or the other. The rule is this If it fails to make a new low, it will without a doubt, make a new high.
We keep watching the market and now after it made a low, GBPCAD went up and broke the high established for the year. This tells us that the trend is bullish. The pair will keep on making new highs until it fails to do.
We do not trade the break. Instead, we wait until it makes a retracement of 50% or more. We draw the fibonacci from the low we established to the highest high and we for that 50% or more retracement (we still do not enter).
Finally, we get that 50% or more retracement. Now we know that the pair will most definitely break out of the high. But we still don’t enter the trade! This is because of we do, our stop loss will have to be all the way below the low, which is an inefficient and risky place to enter a trade. Instead we wait again.
We know that price will now break out into a new high, the target is a 127.2 and 161.8 extension of that upmove (at the very least) This is where the market is heading without a doubt.
After touching the 50% retracement, price goes to challenge the high but fails to break it. Goes down to the 50% retracement and then bounces and finally breaks the 2015 high. As soon as it touches the 1272 target now we get ready to put our entries.
We draw another Fibonacci retracement (notice we use the 8 scale of Gann. this is 12.5, 25, 37.5, 50, 62.5, 75, 87.5 and 100)
It will look like this…
Notice we have to fibonacci retracements drawn now after price hit the 127.2 extension (the last candle in the picture.) we will call them Fibonacci 1 (the one on the left, the first we drew) and fibonacci 2 (the second one we drew.)
Stop loss Is the price at the 50% retracement of fibonacci 1
Entry We use the second fibonacci we drew. We put a limit order at every level of fibonacci 2 that’s found above the 50% retracement level of fibonacci 1.
In the above picture the entries where at 12.5, 25, 37.5 and 50 of fibonacci 2. Its important that the total risk of all four entries is 2% of your balance. The lot sizes are not equal for all of them, instead the lotsize increases as the level decreases. So the lotsize of the 50% entry at fibonacci 2 is bigger than that of entry at 12.5 retracement.
Target You draw a fibonacci extension from the low, to the high reached in fibonacci 2. The targets are the 127.2 extension and 161.8. When price reaches the 127.2 extension, move stop loss to 10 pips above your first order. Close all trades when price reaches 161.8.
Continued…
