Fibonacci Strategy: how to manage positions effectively and when to take profits

Trading using Fibonacci sequences and retracements is a popular technique that helps traders identify key price levels to enter and exit positions. In our article today, we will look at the use of Fibonacci strategies for scaling in, as well as possible ways and when to effectively close a position in profit.

We have already written about increasing positions at a loss in this article on our blog. This method of position management is appealing to many traders because it allows traders to enter positions at a better price. On the other hand, we do not recommend it to less experienced traders who do not have clear risk management rules or have a problem with the psychological side of trading.

For traders who have been through something before and have their risk management under control, this method of position management can be a very good way to achieve a better price on entry, and also increase the potential profit from the trade.

What is the Fibonacci retracement and how does the position raising work?

Fibonacci retracement is a technical analysis tool that is used to identify potential support and resistance levels based on ratios derived from the Fibonacci number series (23.6%, 38.2%, 50%, 61.8%, 76.4%). These levels provide traders with signals of possible price bounces during market corrections.

Position increasing, also known as scaling in, is a strategy in which we gradually increase our position when the price moves against us. The aim is to reduce the average price of buying (for long positions) or selling (for short positions). This increases the chances of making a profit if the market turns back in our favour.

The Fibonacci sequence and increasing positions

We can use the Fibonacci sequence for structured positioning, which helps us to manage risk and capital more effectively. Instead of adding the same amount of lots (or other units) at each retracement level, the Fibonacci sequence gradually increases the position size according to the Fibonacci series values (1, 1, 2, 3, 5, 8...).

How to proceed when increasing the volume of a long position:

1. First entry: open a position at a key price level with a size of 1 lot
2. Drop to 23.6%: if the price drops to this level, add another 1 lot
3. Decline to 38.2%: if the price falls further, add 2 lots
4. Drop to the 50% level: add 3 lots
5. Drop to 61.8%: add 5 lots
6. Drop to 76.4%: add 8 lots

By doing this, we increase our positions when the price drops, thus reducing the average purchase price. If the market turns in our favour, the average price will be lower than our original entry price.

In our example, we show position sizes in whole lots, but traders with smaller accounts should adjust the size of their first position and subsequent positions so that their overall risk matches their account size and basic risk management rules.

Fibonacci Retracement	Price	Lots	Average price	Total Lots
0.0%	184.472	1	184.472	1
23.6%	184.293	1	184.383	2
38.2%	184.182	2	184.282	4
50.0%	184.092	3	184.201	7
61.8%	184.002	5	184.118	12
76.4%	183.891	8	184.027	20

The example in the table shows an example in which we would take a long position of 1 lot on the GBPJPY pair at 184.472. We set the stop loss at 183.712. As the price moved against us, we opened other positions according to the Fibonacci retracement, with the 23.6% level representing the value of 184.293, etc. We thus opened a position of 8 lots at 183.891. As can be seen, the average price, even with the larger subsequent positions, declined rapidly and eventually reached 184.027, much lower than the original 184.472.

When to close a position in profit

Effectively closing a position in profit is just as important as entering the position correctly. There are several ways to decide when to take profits, either simply based on a pre-determined RRR, using Fibonacci expansions, technical indicators or psychological levels.

1. Fixed RRR

The simplest way to close a position is with a predetermined reward to risk ratio. Taking our example, at the original price and given SL (76 points), with a fixed RRR of 2:1, we would set the TP at 185.992.

Due to the fact that the price did not perform well initially, but after reaching the 183.891 level, when we were buying 8 lots, it eventually turned in our favour, we can eventually close the trade with the same RRR but at a much lower level, namely 184.657. Thus, by opening additional positions and averaging the price, we can close the trade with the same RRR but at a price much closer to the current market price.

2. Fibonacci expansion for target levels

The Fibonacci expansion helps to predict the levels where the price could go after the correction is complete.

The most common target levels of the expansion are:

- 100% (return to the original price level),

- 127.2%,

- 161.8%,

- 261.8%.

As the price approaches one of these expansion levels, we can consider gradually closing the position or taking profits.

3. Technical indicators as confirmation

In addition to Fibonacci levels, we can watch technical indicators that will provide us with additional signals to exit:

- RSI (Relative Strength Index): if the RSI exceeds 70, the market may be overbought, indicating the possibility of a price reversal. This is a good signal to close part or all of the position.

- MACD: fading momentum or crossing of the MACD signal lines may be a signal to take profits.

- Moving averages: crossing of moving averages, such as the 50-day and 200-day, can signal a change in trend, which is a good time to close a position.

4. Psychological levels and previous highs

Psychological price levels (e.g. round numbers like 185,000) or previous highs/lows often represent important turning points in a price move. These levels are good for closing profitable positions.

5. Gradual closing of the position

Instead of closing the whole position at once, we can use the gradual closing technique. For example, we can close part of the position at the Fibonacci level of 127.2% and another part at 161.8%. Another option is to move the Stop Loss beyond the current price to protect some of the profits.

Risk management in position increase

When trading Fibonacci retracements and increasing positions, it is crucial to have a stop loss set and follow the principles of proper risk management. If the price breaks below a key Fibonacci level (e.g. 100%), we may consider closing the entire position.

It is also important to monitor the RRR. If our potential profit does not reach at least twice our risk, it may be appropriate to close the position.

Conclusion

The strategy of increasing positions using Fibonacci sequences and retracements provides us with a structured approach to managing positions and reducing the average price. Combining this strategy with Fibonacci expansion and technical indicators allows us to effectively close the position at the appropriate time and realise profits. Proper risk management and trading discipline are key to long-term success when trading with this strategy.