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Making a Trading Plan using Fibonacci Tools

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The Trading Plan

In the previous article, we’ve exposed a brief introduction to the Fibonacci Sequence, retracements, and projection concepts. In this article, we will show how to make a trading plan using Fibonacci Tools, specifically, the retracement and expansion, although we will not explain Risk or Money Management rules and methods.

In practically all industries, with every task, there are procedures to define what to do in each process stage. Professional traders too, have operating methods. In this sense, retail traders have a significant procedural disadvantage compared with professional traders. A way to reduce this gap is to make a working plan. A Trading Plan is a route map, not a treatise, where we will answer the following questions*:

  1. What market to trade? I.e., Forex, Indices, Commodities, EUR-USD, DAX, Gold.
  2. What timeframe should we choose?
  3. What are the market conditions, the arguments for the entry setup?
  4. Where is our stop-loss level; this is the invalidation level of the scenario.
  5. Where to set a profit target or the objective zone of the trade setup.
  6. Finally, a chart including market conditions and its analysis

* Note that this is not an exhaustive list; the reader could incorporate or eliminate decision criteria.

Practical Example

Once we have a good trading plan, let’s consider a specific market and propose a scenario for a trading opportunity. In figure 1, the cross EUR-AUD <EURAUD> in the hourly chart has lost the latest minimum (1.55681) on the 5th December, then it moved on a retracement segment from F(50) to F(76.4). That area could be a potential entry zone for a short-selling setup on a bearish continuation movement.

Fig 1: Potential Reversal Zone. (source: Personal Collection)

In figure 2, we define Profit Target zones; these levels are FE(100) 1.54099, FE(1.618) 1.52333 and FE(200) 1.51424. The invalidation point is 1.57705; this is the maximum reached on the 1st of December.

Fig 2: Potential Profit Taking zone (source: Personal Collection)

 

Some entry possibilities are:

  • Sell Market, i.e. spot price 1.56555.
  • Sell Limit, i. e., F(76.4) = 1.57026.
  • Sell Stop, i.e., F(50) = 1.56267.
  • Sell if price closes below the last low 1.56016.

A summary of the arguments exposed in the Trading Plan example are:

TRADING PLAN
Instrument EURAUD
Timeframe H1
Date Dec-11-2017.
Order Sell
Entry Level 1.56276
Stop Loss 1.57705
Take Profit FE(1.618) = 1.52333
Arguments The price has broken down through a relevant minimum, and currently, it has made a retracement to the F(50) – F(76.4), this is a potential zone for a bearish continuation…
Chart
Trade Result (**)

 

(**) Trade Result: This is not a section for self-flagellation nor a best-trader-in-the-world award as if we were to record +100 pips at the end of a trade. This part is about the “learned lessons” of a finished trade, independently of its result, bringing a higher objectivity to the performance. In summary, the Trade Result is the way to learn about the trades, it is where we have the opportunity to visualise and avoid future mistakes in the execution or to improve the analysis criteria on market entries and exits.

 

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 ©Forex.Academy

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