Assume that you have now mastered how to detect quality trading opportunities that you can use to activate spread bets exhibiting optimum profit potential at minimum risk. However, do you next know how to exit your trades to record the maximum returns? A popular technique used to accomplish this objective is called the Fibonacci Extension Levels.
This article is intended to introduce you to the main concepts of this important tool. You will discover that most spread betting trading platforms enable you to readily install these key levels onto trading charts which you can then deploy to determine sensible and achievable profit targets.
Possibly the best way to introduce this technique is by displaying an example. Envisage that you have just executed a new spread bet and have also supported it by issuing a stop-loss order. The next problem is to determine where you should locate a take-profit order so that price has an excellent chance of hitting it before expiration. When performing this task, you should always attempt to adhere to the famous trading maxim which advises: By doing so, you will provide your strategy with the best reward-to-risk ratio possible.
Essentially, you can use the Fibonacci Extensive Levels to help you achieve these objectives, as shown by the following diagram. This concept is structured on the fundamental premise that the price of an underlying asset tends to advance in a formation, which is specific to the time-frame selected. Essentially, during a bullish trend price will initially climb higher move 1 , then retract move 2 before proceeding higher once again move 3.
The most important step in this sequence is the second surge higher move 3. The Fibonacci extension levels can be utilized during this stage to estimate as accurately as possible how far price is most likely to travel.
There are three Fibonacci values that are normally utilized to achieve this task, which are the 0. The next diagram demonstrates how these Fibonacci extension levels relate to the size of the movement recorded during stage 1. The second level is denoted by 1. You will discover that you will not even need to calculate these values yourself as the software supported by your trading chart package will do this automatically for you.
You simply have to activate the Fibonacci tool and then drag your mouse pointer from the high point of the displayed bullish trend to its lowest point. In order to accomplish this objective proficiently, you need to identify a time frame that clearly displays the price movement of an asset. The following diagram illustrates this process in action as you can readily detect the sequence, which is represented by the yellow line, on the hourly chart.
In addition, you should be able to identify the top and bottom of movement 1 which are denoted by arrows. Once you have successfully accomplished this objective, you simply need to drag your Fibonacci tool between these two distances.
You now need to adjust the pricing grid so that the zero value is located at the bottom of the retraction recorded by the second movement. The three Fibonacci levels will then appear above this value. For instance, on the above diagram, you can clearly detect the 0. You can bring this level into focus by simply zooming out. A popular spread betting strategy is called the Trend Retracement and is based on the Fibonacci retracement levels. Once you have identified a well-defined trend, then you can utilize such a strategy to identify quality entry points of spread bets everytime a retraction occurs.
However, once you have achieved this task, the next question is how do you determine the best locations to position target-profit orders? How can you assess with any accuracy how far price will next move higher? As already explained, many traders deploy the Fibonacci extension levels to help them answer these questions. If you can learn how to project these movements then you will definitely be able to identify the optimum profit targets.
By doing so, you will improve the reward-to-risk ratio of your strategy and enhance your ability to spread bet successfully. You can then utilize the most commonly used Fibonacci extension levels to locate your profit targets, which are 0.
If the strength of the prevalent trend is weak to medium, then you should opt to locate a profit target order at 0. However, if you assess that price has acquired significant momentum and is travailing within a strong trend, then you should seek additional profits by choosing 1. Mail will not be published required. Leave a Reply Click here to cancel reply. Practice Trading at eToro Now! Best Forex Brokers Benefits of Trading with our BO Indicator:More...