There is a saying…
Any trader can get into a trade, but only the best traders know when it’s time to exit.
And with the recent price action in the markets, it couldn’t be more true.
Over the last few weeks my skills have been put to the test.
Picking the direction of the markets while timing entry and exits has been challenging.
Luckily I’ve got tools that help with market timing!
But sometimes tools alone are not enough.
You also have to be nimble and be willing to adjust to the changing market conditions.
That’s why I rely on Fibonacci lines to help guide me.
And that’s exactly what I want to talk to you about today.
If you want to improve your entries and exits—then this is a must read.
Rule #1 of Fight Club : You do not talk about Fight Club.
Rule #22 of Zombieland Rules of Survival : When in Doubt, Know Your Way Out – Always have an escape route. You never know when you might have to run.
Rule # 3 of my trading plan : Listen to my exit rules
Remember…everything has rules for a reason – trading is no different!
That’s why I set up my own rules and make sure to strictly follow them when trading…
And one rule is to make sure I exit my trade when my rules tell me to.
Remember – the rule is there for a reason!
Let’s start with an example with a long trade in the SPY that we entered.
In an uptrend, there is a general idea that you want to take profits at a Fibonacci price extension level.
What Do Fibonacci Extensions Tell You?
Fibonacci extensions are one of the best tools to project future areas of price reversals. Fib is the key to trading markets that seem to be heading “straight up” with no end in sight.
These are tools that you should get familiar with when things are quiet so you know how to use them. Then you will have your tool to trade when the time comes and it’s hard to tell where a target is.
And this is especially difficult during the “fog of trading.” This happens when momentum and excitement is clouding your judgement and can cause you to make a bad decision.
How Do You Use Fibonacci Extension Tools?
Fibonacci Extension lines are typically manually drawn. Each trader identifies key levels as important but there are some general rules that you’d like to follow.
Key Tips For Placing Fibonacci Extensions
- Select a significant high made in the markets
- Identify a low (not a current price if trading at lows of day)
In the SPY chart below, you can see how I selected these 2 points for the FIb tool to calculate its prices from.
After you connect the two points, you can see the rest of the Fib levels to draw over the rest of the chart.
So now that I entered the trade near 11 am, I need to figure out where my exits are going to be.
Finding Your Targets
After getting into the trade around 11am, it’s time to find my exit levels.
This is where Fib Extensions Levels come into play.
The Fib levels are being held as the SPY decided to head higher it made sense to wait for the extension level 1.272 as an exit.
Here’s a look at how the trade performed.
Here’s a summary of what happened after the Swing Low occurred giving us the ability to use the Fib levels.
- Price rallied all the way to the 78.6% fib level which nearly lined up with the previous pivot
- It fell back to the 23.6% fib level and held where it found support
- Price rallied again and hit some resistance at 78.6%
- Price fell back to 61.8% where it found support in the stair-step pattern
Now.. that i’ve got all that reviewed, what’s the exit?
Let’s check the Fib Levels.
There are 2 targets that come up.
- The 1.0% resistance
- The 1.272% resistance
If you were conservative, then it’s best to take the exit closest to the price, but in the case the markets were acting well and decided to place my exits at the 1.272 Fib Level.
Limitations with Fib Levels
Of course, there is nothing perfect in trading and this tool comes with its own set of limitations.
First, there is not a real way to know which exact Fibonacci level will provide support or resistance for the stock. Just remember that any, all, or none of these levels may or may not act as support or resistance.
Another problem is not knowing which swing points to start looking at when creating the Fib extension levels.
Remember, the thing is that there is no single right way to draw fib levels. But with a lot of practice and knowing what works for you, you’ll make better decisions of picking those points.
If you’re ready to continue on learning then make sure you take my latest masterclass. You’ll learn the strategies and techniques that have made me one of RagingBull’s most consistent traders. Enrollment is now open.