A concept we always use in trading is the importance of using support and resistance levels for entry and exit of positions. Like getting a good entry, important for successful trade, is exiting your trades at levels that maximize your gains. In this article, we will show you how to use Fibonacci expansions for maximizing gains.
Fibonacci expansions are price levels created by technical analysis tool by locating primary price action and its retracement. The levels drawn on the chart using this tool would normally be difficult to locate using ordinary charts. This makes this tool extremely useful for picking exit points for your trades.
When there is an uptrend or downtrend in the instrument, there are going to be times when price moves counter trend. This is called pullback or retracement. When the counter trend move is finished, the price is resuming in the trend direction. We will show you this on CAD/CHF example happening now. On a daily chart below you can see a primary price action swing high from 0.7050 to 0.7800 level, and a pullback from 0.7800 to 0.7400.
Now make sure that you choose Fibonacci expansion tool from your platform (usually it is built in tool) and apply it to the chart as shown below. Connect primary swing high 0.7061 (A) with 0.7766 (B) and with pullback point 0.7457 (C).
How do you interpret Fibonacci expansion on CAD/CHF?
You can see that if you have entered long position now, your SL should be few pips below 0.7457 level. That is the first level identified. What is the target? The first target would be 61.8% Fibonacci extension 0.7900 level. The second and the ultimate target for your long trade would be 100% Fibonacci expansion 0.8162 level. For example, you can exit half of position when the first target is reached, and lock the rest of the trade with moving SL to break even while waiting for the second target to be hit.
You can use this tool for any instrument on the market and it will become easy for you to maximize your gains with your trend trades
Happy trading! (click on the chart to enlarge it)
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