How to Use Fibonacci to Place Your Stop so You Lose Less Money

Babypips Elementary - Grade 3

Why is stop‐loss placement just as important as entries and take-profit targets when using Fibonacci levels?

Because without a defined exit, you risk large, uncontrolled losses if the market moves against you.

Method #1: Where do you place the stop if you enter at the 38.2 % Fib retracement?

Just beyond the next Fibonacci level (in this case, past the 50.0 % retracement).

What is the rationale behind placing a stop just past the next Fibonacci level?

If price exceeds that next level, it invalidates the idea that the original Fib level would hold as support/resistance, so the trade thesis is wrong.

What is the main drawback of placing a stop just past the next Fibonacci level?

It assumes your entry is perfect; a minor spike can hit the stop and then reverse in your favor, especially in volatile markets.

For what type of trades is the ‘next-Fib’ stop method best suited?

Short-term or intraday trades when you expect an immediate reaction from the Fib level.

Method #2: Where do you place the stop if you are long in an up-trend?

Just below the most recent Swing Low (a potential support level).

Where do you place the stop if you are short in a down-trend using Method #2?

Just above the most recent Swing High (a potential resistance level).

What advantage does placing a stop past the recent Swing High/Low offer?

It gives the trade more room to breathe and reduces the chance of being stopped out by a normal retracement.

What is the trade-off when you use a wider stop past Swing High/Low?

You must reduce position size to control risk, and the reward-to-risk ratio can deteriorate if the target isn’t adjusted.

Which stop-loss method is better?

Neither is universally ‘better’; combine Fibonacci with other tools (support/resistance, trend lines, candlesticks) and choose the stop placement that fits the current market environment and your trade horizon.

Why shouldn’t you rely solely on Fibonacci levels for stop placement?

Because Fib levels are not foolproof; combining multiple technical tools tilts the odds in your favor and provides more reliable exit point.