Let me introduce you to the trading system, in which market entries and exits are determined on the grounds of Fibonacci ratios. We are going to enter the market with pending orders (sell limit/buy limit) when the price is corrected to the key ratios of 38.2% and 61.8% from the momentum. Stop loss is placed above the following value: high/low + 5 pips + spread. The risk of 2% is allowed per deal. The maximum number of deals on Forex is 2. Therefore, the utmost loss per one entry is 4%.
So, we have defined the main elements. Now let’s go!
In principle, the trading system aims to recognize the third wave. We should enter the market during correction in the second wave which follows the first impulsive wave. Here, we don’t have to expand on the wave theory. On the charts, I am going to show what patterns we should be alert to when entering the market.
As an example, let’s consider the GBP/USD pair in the 5-minute time frame.
Buy limit is placed on the following conditions:
- Each successive low is below the previous one;
- The latest high of a zigzag is broken upward.
It is clearly seen on the chart that we met the conditions to place the buy limits. The pending orders were set at the levels corresponding to the ratios of 61.8% and 38.2% from the momentum. The price retraced to the level of 61.8%, touched our order, and went on moving northward. If we enter the market with one order, I recommend placing take profit at the level of 161.8%, which has been already hit. If you would like to make two orders, it is better to book profits at 161.8% and 261.8%.
On this chart, you see that two take profit orders have beentriggered.
I like this trading system because in case of the wrong market entry we minimize losses according to a predetermined risk per deal. What is more, a potential profit is several times bigger than a probable loss.
Trade at a profit!