Swings are a great way to identify the correct stop loss and target points. If you can identify a swing, you can easily make out the high probability target areas by drawing the Fibonacci extension.
The general rule that the traders follow is to buy and sell at 7 to 20 pips lower or higher than the recent lowest or highest price touched by a currency pair. The best way to identify the swings and target areas is to use the Double Trend Trap Trading Strategy (DTT).
Using this strategy, the counter trend moves are determined by drawing a trend line till the current trend breaks. Let us understand this with an example:
Following is the graph of the movement of EUR/GBP. We have created a trend line which shows that the currency pair was going bullish finally breaking the trend at the end. This means we are getting an opportunity to short a position, but here a question arises: what should be the stop loss?
To identify this, you have to determine the recent high made by the currency pair. The square on the following chart shows the recent high made. So the stop loss should be placed a few pips above the recent high.
Hmm….easy…but what should be the target price?
To identify this, you need to learn the way to identify Fibonacci extensions, but to determine the extensions; you need to determine the correct swing. Without this, it is highly possible that you will place a wrong target which ultimately leads to low or no profits.
According to the above chart, you know the correct swing. So, to draw the Fibonacci, you place the cursor at the swing low and drag it all the way up to the swing high. This shows the possible target points as shown in the following figure:
According to the above determined Fibonacci numbers, a target of 161.8 gives a good price extension.
Now, you have placed the target price and stop loss; it is the time to check where the market finally took its track. To understand this, check the following graph:
The chart shows that the markets have made a track as expected and moved down to your target point. Although everytime market does not move as expected, this is what happens most of the times. But to make profits, you should have a good eye for identifying a swing.
A common mistake made by most of the beginners is that they take the entire bearish move to determine the target price and stop loss. This way they are not finalizing a nice target and not making good profits. So, instead of looking for an entire bull or bear run, go for mini swings. This can create a huge difference in the win rate.
The strategy of double trend trap trading is of huge advantage and is highly capable of boosting the win rate.