There are many different ways you can enter a trade with the Fibonacci tools. Now I am going to introduce the safest option which works very well for me for a long time. This is also the option commonly used by many professional traders.
How to Enter
The main idea is to buy when the correction ends and there is a breakout. We are looking look for a place where we there is the best chance to enter at the right moment and into right direction. The place is a break above a recent high in an uptrend or below a recent low in a downtrend.
In theory, it should look like in the picture below:
- Identify the main trend. You should know what the main trend is and in which direction you will be looking to enter a trade.
2. Identify the low-high/high-low swing. Find the swing which you will draw the retracement and extension lines for.
3. Wait for the end of the correction to part C. Let other traders play between the retracement lines. Just be ready and wait to enter the position.
4. Wait for the breakout above the high from swing A-B (to go long) or below the low from swing A-B (to go short).
5. Wait until the price moves to the extension line and closes the position at point D
Above the picture the main trend is up, so we want to buy silver. Finally, we identified the AB swing and waited for a correction which turned out very mild. Our entry point is when the price closes above point B, which, in this case, was very rapid. Take a close look at the chart and notice how fast the move was. In a few hours the price climbed up to the 161.8% extension line which was strong resistance and the best exit point. Right afterwards, there was a strong sell off. Those using the lagging indicators probably ended with a loss.
Let’s take a look at how this strategy can be used in a downtrend. On the chart below we have a WTI oil daily chart. The trend is down, so we look to take a short position (sell WTI). It is easy to find the AB swing. The correction ended at point C (78% retracement line). We wait for a break down below point B where we enter a short position. The move down was very strong and it ended at the 200% extension line.