Last week I introduced you to the Fibonacci sequence, a short story on how it was discovered and how to use it when you trade the markets. Today is a follow up lesson, where I’ll share with you my Fibonacci trading strategy which you may incorporate in your trading.

#### Three lines you’ll need to execute my Fibonacci trading strategy

There are three main Fibonacci retracement lines we’ll use to identify trades.
• 23.6%
• 38.2%
• 50%
These fib lines are used to find the ENTRY, STOP LOSS and the TAKE PROFIT levels, with each trade.

Before we get into the system, you’ll first need to understand how we calculate these Fibonacci ratios using the Fibonacci sequence.

Here’s a reminder:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144 and so on…

To calculate one of the fib retracement lines, you’ll simply divide one number into another number, for instance.

To calculate the 23.6% fib line, you’ll divide one number by the number that is three positions to the right for example:
8 ÷ 34 = 0.2352

To find the 38.2% you’ll divide one number by the second number two positions to the right for example:
55 ÷ 144 = 0.3819

Please note: The 50% retracement line does not come from the Fibonacci sequence.

It is mainly plotted to show you where half the distance is between the swing high and swing low prices, to give you a better idea on which direction the market is moving in.

You’ll notice when you drag the Fibonacci retracement indicator (from the swing low to your chosen swing high prices) on the ALSI Top 40 chart using your charting platform, you’ll see six fib lines will automatically populate:

Fib line 1:
100% – Swing High = 70,522

Fib line 2:
61.80% – 68,560

Fib line 3:
50% – 67,954

Fib line 4:
38.20% – 67,348

Fib line 5:
23.60% – 66,598

Fib line 6:
0% Swing low = 65,386

Next, let’s get into the trading strategy.

But first you NEED to see the complete setup via the chart, so you can come back and see how everything fits into place.

ENTRY
First we saw a Rising Flag (Shaded area).

The price then broke below the flag (Yellow circle).

This means because the price broke down, we are looking to go short (sell), because we expect the price to continue down. And as the price drops further, we will then buy it back at a lower price and pocket the profits.

That’s going short (Selling) where we profit from the downside of the market.

Now I like confirmation when we get a breakout to the downside, and before we go short.

So, we then wait for the retest, where the price goes back above the 50% Fib line 3 (67,954).

Once it breaks below the Fib Line 3 – 50% Fib Line and opens above it.

That is my entry level.

In this case, the open price of the next candle, below the 50% fib line 3 is at 67,759 (Blue arrow).

STOP LOSS
To establish the stop loss price level, you’ll simply use Fib Line 2 – 68,560 (61.80%).
If the price closes above this level, it will confirm upside to come.

In this case, to protect our portfolio, we would place the stop loss at 68,560 – 61.80% Fib line 2 (Red line).

So, we have the entry at 67,759 and the stop loss level at 68,560.

We just have one more level to calculate.

TAKE PROFIT
Remember, with trading – Our losses must ALWAYS be smaller than our winners.

So, for this reason, we would skip the Fib Line 4 to let the market run down.

And so instead, we will set our take profit level at Fib Line 5 (23.6%), which in this case is at 66,598 (Green line).

This way, you’ll look to gain twice as much as you’re willing to risk.

So, we now have four trading levels and two reasons for entry.

REASON 1: Price broke below the Rising Flag

REASON 2: Price retested the Fib Line 2, broke below and opened below Fib line 3.

Level 1: Entry (Just below Fib Line 3) – 67,759

Level 2: Stop loss – Fib Line 2 – 68,560

Level 3: Take profit – Fib Line 5 – 66,598