Breakout trading is profitable but problematic as most breakouts tend to fail. You never know which breakout is succeed and which one will fail. So, how do you trade breakouts? One strategy comprises using the Fibonacci Projection Levels to trade these breakouts. This strategy minimizes your risk in case the breakout fails and maximizes the profit if it succeed.
What you will do is gradually enter the market at the two Fib Projection levels of 138.2% and 162.8%. When you spot the breakout candle and think that the breakout will continue, you can enter the market with half your trade size. When the breakout continues in the direction that you wanted, you can commit another 1/4th of the trade size at the 138.2% Fib Projection Level. If the breakout still continues in the right direction, you can commit the last 1/4th trade size at the 162.8% Fib Level.
Let’s use an example to make this Fibonacci Breakout Trading Strategy clear. Suppose, you trade the lucrative EURUSD pair. You spot the breakout candle that is 100 pips in length with the high at 1.2300. You plan to trade this anticipated breakout with one standard lot. You can also trade with two or more lots. The strategy will work as long as you take care of the ratios when entering the position size.
You will enter the market at 1.2300 with 50,000 units or 1/2 lot. Place the stop loss at the 38.2% Fib Retracement Level in case the price retraces itself. This comes to be 1.2260. If the price retraces itself, you will be out of the trade. But since you have committed only lot, you will only lose 20 pips.
Add 1/4 lot or 25,000 units when the market reaches the 138.2% Fib Projection Level which comes to be 1.2338. Tighten the stop to 1.2298.
Add the final 25,000 units or 1/4 lot at 162.8% Fibonacci Projection Level. Your average cost now stands at 1.2325. Take profit at 1.2400. Your reward will be 75 pips and risk will be 25 pips, giving you an excellent risk to reward ratio of 1:3. You can use a trailing stop after you commit your last lot to continue in the trade and take as much profit as possible as long as the price move continues.
So by using Fib Projection Levels, you gradually added to your position size while at the same time, you got the opportunity to confirm the breakout. This reduced the risk in the trade and maximized profit. Try these Forex Signals by two top gun traders in a friendly competition. Learn this powerful Fibonacci Retracement method FREE that pulls 500+ pips per trade.