This trading system seems to be relatively profitable because it quickly stops the losing trades and let the winning trades run, ie the ideal of all profitable trading systems. As with any strategy is very important to have discipline and follow the rules to the letter, not “hunches” or anything similar.
The first thing we will do is set the graphic settings as follows:
- 1 Japanese candlestick chart.
- 1 Moving Average SMA of 50 periods in the High.
- 1 Moving Average SMA of 50 periods in the Low.
- Fibonacci extension pulls.
By using a SMA 50 in the High and a SMA 50 in the Low we form a channel which use is described below:
- When a candle opens and closes above or below the channel formed by the two SMA 50, open a long position (buy) or short position(sell) respectively. For example, if a candle opens and closes above the channel, the trader must open a long position.
Note: It is not recommended to buy after a candle close above the channel if the price is very close to and below a resistance line. To many traders, the support and resistance lines determine much of the behavior of the market and in fact there are many professionals who trade based on them. So if the channel break occurs near one of these levels, it is best to wait until the price also break the resistance / support before opening a position.
- If at any time the candle closes near the channel it is best to leave the trade and close the position. Also it is best to always close the position in the Fibonacci level 423.
Rule to cut losses and take profits
- Once in position, the trader must have placed the Fibonnaci objetives (even before placing the order entry).
- After reaching the Fibonnaci level 123, the trader must keep a stop loss at a distance equal to two Fibonacci levels with respect to the price. For example, if the price reaches the Fibonacci level 161, the stop loss would be at level 100 (the average is Fibonnaci level 123).
The author of this trading technique found that this technique gives enough space for the trades to develop and in many cases allows to reach a long-term goal in Fibonacci 423. Also, if a trade signals that in some point it will fail, this methodology allows the trader to take a substantial percentage of the profits as the stop moves dynamically with the price at close range, but not too close (the largest problem when you start moving the stop). Worth mentioning that this is a personal preference of the trader.