One of the first technical skills traders learn is how to draw a basic trendline. Traders will do this by connect a series of points to create a key level of support and resistance while looking for trend trading opportunities. However, while drawing a trendline may be easy, difficulties can begin to arise when looking for areas to place new orders.
- Trendline Trading
- Fibonacci Validation
- Entry Setup
Below we can see an example of a trendline in action using the EURGBP daily graph. A trendline has been established by connecting the marked July 31st and August 28th highs, which have respectfully been labeled point 1 and 2 below. The key to trading is to find an entry to sell the pair, once the trendline has been validated. So how can a trader get an idea of where a retracement at point 3 may occur?
Learn Forex – EURGBP Daily Trendline
Trendlines & Fibs
One way to validate an entry along a trendline is through the use of Fibonacci retracements. In a downtrend traders will look to pinpoint a potential retracement upon the market establishing another test of the trendline. To find this point, traders may measure evaluate the retracement values between the point 2 high and the most recently created low. Once found these retracement values can be used in conjuncture with a trendline trading plan.
Below we can see our downward trendline in conjuncture with the Fibonacci retracement tool. Astute traders will notice they create a confluence of resistance near .8500 on the EURGBP. Knowing this, traders can set entries to sell the market upon a retracement to this value. In the event price descends after testing resistance, an entry will trigger selling the EURGBP.
Learn Forex – EURGBP Daily with Fibonacci
(Created using FXCM’s Marketscope 2.0 charts)
Stops and Limits
Fibonacci can also be useful when managing stop orders. Trendline traders may look to the next Fibonacci line, outside of the trendline, to place stops. In the above example, using this methodology, stop orders would be placed above .8537 near the 61.8% Fibonacci retracement line. Once a stop order is decided, a Limit may be placed using a simple Risk/Reward ratio as the market moves towards lower lows.
---Written by Walker England, Trading Instructor
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