Swing trading is a half-way house between short-term (or day) trading and long-term position trading. On average, my successful trades last anywhere from a few days to a few weeks and rarely longer than three months. It suits my personality to trade in this way. Naturally, my losing trades do not last as long.
I am a swing trader because I do not want to sit through large drawdowns while waiting for my trend to re-emerge as is often necessary when trading long-term. And who can say that the drawdown will not become permanent?
But that is not to say I will reject an opportunity to take a short-term profit within a day or so if presented, or to jump on board a longer-term position trade if I believe the waves are lining up auspiciously.
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And that is where the Fibonacci levels come in they can help pinpoint excellent areas for both the taking of profits and also the establishment of a new trade.
A short-term Fibonacci trade entry in GBP/USD
In the EUR/USD, I identified a long trade entry on Draghi Day 3 December. Although GBP/USD rallied with the euro on that day, I did not get such a definitive buy signal in 'cable' (GBP/USD). But I certainly did a few days later on 8 December.
This was the hourly chart on Tuesday, 8 December:
On Tuesday, the market was retracing the large gains provided by the Draghi bounce the previous week. This is a normal reaction after a 'surprise' spike move. I placed my Fibonacci levels on that bounce and the market was then testing the Fibonacci 62% level.
If I had my Elliott wave labels correct, I have a wave 1 (or A) up and the market was finishing off the wave 2 (or B), which would end at either the 62% level or the 78% level and that latter level was my line in the sand. If the market moved below it, I would abandon my labels.
But if one of these levels held their ground, I could look forward to a third (or C) wave up and third waves are my absolute favourite waves to ride, simply because they are usually long and strong. The benefit is that in a third wave, your protective stops are in little danger of being hit, and you can rack up some impressive profits very quickly. I like that.
So a long trade at either level was indicated.
Here is the updated chart as I write on 9 December:
With the large positive-momentum divergence hinting at a sharp rally phase ahead, the Fibonacci 78% level held. And right on cue, the market rallied sharply off that support and as I write, the market is breaking up through the upper wedge line to help confirm my wave 3 (or C) label.
Isn't that pretty? And all I did was apply my Fibonacci levels on the hourly chart to find a suitable low-risk entry. And the wedge pattern should herald a substantial rally.
A profit in FTSE at a Fibonacci target
Here is a great example of how to combine the Fibonacci levels with the basic precepts of Elliott wave theory.
Here is the FTSE hourly chart:
I was watching the November rally and looking for a turn down. And in early December, I got the signal I was waiting for and placed a short trade just under the 6,370 level. As the market moved lower, I placed my Elliott wave labels as shown.
And when the market hit the Fibonacci 78% level (support) on my wave 5 as the momentum was diverging massively between my waves 3 and 5. That was all the information I needed to take short-term profits on my shorts at the 6,120 level for a very tasty 250 pips profit in five trading days. Not bad.
Of course, the market may continue lower, but I am not concerned I still hold a part short position (split bet strategy) I have taken an excellent short-term profit and I can always get back in later provided I get another excellent indication.
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