This is still a continuation of the Fibonacci chapter if we have previously studied how to use Fibonacci Retracements with support and resistance, Fibonacci retracements with trend lines, Fibonacci retracements with Japanese candlestick patterns, how to determine targets with Fibonacci extensions, in this chapter we will learn how to place stop loss with Fibonacci.
You know that there is no perfect trading system in getting profit.
So placing a stop loss is an important part of the forex business.
By using Fibonacci we will learn how to place stop losses with less money so that our risk management will be tight.
We can use Fibonacci levels to place stop losses so that the amount of risk in trading will be more planned.
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Two ways to place stop loss with Fibonacci
Basically, putting a stop loss on our trading account is also important than only place take profit.
We cannot just enter a trade using Fibonacci levels without having a clear way out.
Because if so, then the use of the Fibonacci tool will only backfire on our account.
In this class, we will learn several techniques for placing stop losses when we decide to trust Fibonacci levels as our “assistants” in trading.
#First way, place stop loss past next Fibonacci
The first method is to place a stop right after going through Fibonacci. That is, if we plan to enter the 38.2% Fibo level, then we place our stop loss through the 50.0% level.
If we feel that the 50.0% level will be reached, then put a stop past the 61.8% level, and so on. Simple is not it?
Let’s look at the same EUR/USD chart as we learned in the last Fibonacci class.
For example, we have been steady to enter at the level of 50.0%. then we can place a stop-loss order at 61.8% Fib level.
We have done this way with the understanding that the 50.0% level will become a resistance point.
Therefore, if the price surges beyond that point, then our trade idea will no longer apply, stop loss will liquidate.
The disadvantage of this stop loss method is its very dependence on the perfection of our entry, so if our entry turns out to be less precise it is easy for the market to liquidate the stop loss.
Placing a stop in the order of Fibonacci levels means that we are very confident that a support or resistance area will be formed.
And, as we often said, using the drawing tool is not an exact science, trading is about probability, we just look to enter the market when coming high probability signal.
But the market might surge and then hit our stops, and eventually move in the direction of our trading.
If this is the case, then we can only be annoyed with market behavior while welcoming deep regret.
Well, however, the possibility like that could happen, right?
But more profit that is not achieved would certainly be better than losing, so immediately put a stop loss and let the excess profit go with the trend.
So the advantages of this method will be more suitable for traders who trade short-term or intraday, and the total risk is also only with less money.
#Second way, place stop loss past recent swing high/swing low
If in the first way we place a tight stop loss using the next Fibonacci level, in the second way we do it differently.
If we want to be a little safer, another way is to put a stop loss through the latest swing high or swing low.
This type of stop-loss placement will give us more room to breathe and give a better opportunity for the market to move to support our trade.
For example, when the market is in an uptrend and you are in a buy position.
You can place a stop loss just below the latest Swing Low which acts as a potential support level.
Or vice versa when the market is in a downtrend and you are in a short position.
You can place a stop loss just above the Swing High which acts as a potential resistance level.
The example above is in the EURUSD pair with a 4-hour timeframe, which is where the market trend is going up.
If the market price exceeds the swing high or swings low, there might be a trend reversal, and your stop loss will be liquidated.
That is, our trading plan is too late to be implemented.
Placing a larger stop loss is likely to have the best impact if used on long-term trades, and swing trades.
But the disadvantage is that the total loss is greater than the first method with the same position size.
Therefore a greater stop loss must also be adjusted to our size position.
If we tend to trade at the same size position, we can experience big losses.
Especially if we enter at Fib levels that are one level below the level they should be.
This can also lead to an unfavorable reward-to-risk ratio.
Because our stop loss is too wide, so it is not proportional to our profit potential.
Which way is better?
After you understand how to use Fibonacci to place stop losses.
Maybe you will ask, which of the two is the best?
Actually, it is the same as using a combination of Fibonacci retracement tools with resistance support, trend lines, etc.,
Where the point of combining them is to get the best entry position.
But, again, we must really master the use of these tools to analyze the situation that is happening in the market to help us determine a good stop-loss point.
The first way to use the Fibo level afterward, this gives a stop-loss limit in a tighter in pip.
But depending also on the size of your position, if you open a position with a higher lot size.
Although the loss of short pips will provide a large loss in currency.
While the second method uses swing high and swings low if the stop loss is reached.
The distance loss in the pip is greater, but this also depends on the size of your position.
With the smallest lot size allowing the risk limit in the currency to be considered small.
However, as much as possible, we don’t just rely on Fibo levels with support and resistance points as the basis for placing stop losses.
Capital amounts, margin levels and so on being a concern in planning risk management.
Remember, the placement of a stop loss is not something sacred and certain.
But if we have the ability to combine how many tools at once.
Then our chances are greater to get good exit points.
Room for trading to breathe, and risk-reward ratio that is not too big.
Stop loss is part of the money management plan in forex trading, by applying stop loss if you experience a loss.
Thus there is still capital remaining, so you can open new positions with new opportunities
But there are indeed some traders who have the courage to trade without using a stop loss.
For example, those who use averaging or martingale.
Those who dare to trade without using stop loss understand correctly that the final stop loss is a stop out account,.
The first thing that becomes their preparation is mental and capital.
Trading without a stop loss is for those who are willing to get a stop out of the account and lose their money.
In the final word, a professional trader always pays attention to the risk, even the trade in forex or cryptocurrency, risk management is essential to keep it out.