Allow me to take you through some trade analysis of a limit order that I recently placed.

This set up was taken on a daily chart, price action being the primary focus. Only indicators used was a trend line and Fibonacci retracements and extensions.

Over the last few weeks, GBPUSD has been on a downtrend. The market began to retrace a bit after it hit the area of support around 1.6100. We can determine that to be an area of support as if you look back you can see that price has dropped to that area only to bounce back up.

As price began to rise last week, I drew an upward trend line. The idea behind the trend line is to not get faked out by any bearish signs that might compel me to enter a short trade prematurely. I would more or less be looking for a daily candle to break through the trend line and then close below it.

Two days ago price did turn around. It hit the trend line and bounced back from it a bit. In doing so, it created a bearish candlestick pattern known as an evening star. The next day solidified the bearish move by closing below the trend line. By having both the evening star pattern and the break of the trend line, it was safe for me to say that the market was currently bearish.

However, I wanted additional confirmation that this was just a retrace and not a complete reversal in the market. I drew Fibonacci lines from the high made about a month ago to the low from a couple weeks ago. It was discovered that the evening star pattern originated around the 61.8 retracement.  That particular line is considered to be the Golden Ratio as price commonly bounces off that area to return back to the original trend.

This gave me all the information I needed at this point to know that I was going to be entering into the market with a short position. Now it was a matter of selecting my entry, my stop loss, and my profit target.

My entry would be 10 pips below the low of the candle that closed below the trend line. My stop loss would be 10 pips above the high of the evening star pattern. And finally I redrew Fibonacci lines again, this time going in the opposite direction. I wanted to mark my profit target at the 161.8 Fibonacci extension.

I found that it is common that a successful bounce of the 61.8 retracement line can push the price towards the 161.8 extension line. It does not always happen like that, but often enough that I always set that as my initial profit target.

If this trade does move in my direction, I do suspect that I might have to stay in the trade for a couple weeks. A lot can happen in that time. I might pull out early with profit. I may even add more units to the trade. In the end, I will allow price action to make that determination for me.

Related posts:

1. Trade Signal Update – GBP/USD short – 195+ pips!
2. Trading Fibonacci in Forex
3. Trading Signal Update – GBP/USD Short – 440+ pips!
4. Trading with Trend-Lines in Forex