The following is an extract from an original post I made on the TraderZine Forums.
On the subject of stop-losses…
Novice traders will place a mechanical stop-loss that does not take into account market action, momentum, volatility. A Fibonacci based stop-loss takes all of those into account. Also, a novice trader will blindly cling to hope when the trade is not working out, wishing that the stop-loss will not be reached.
It doesn’t take much skill to realize that a trade is not working out. Watching price action and minor (lower-time-frame) Fibonacci levels, you can tell whether momentum is going against you. Why wait for your stop to be hit? You can exit well before the Fibonacci stop loss is hit, and you can re-enter if you like.
As traders improve their loss management, the Fibonacci stop-loss will be merely a “disaster-stop”, but the actual losses will be much smaller, because the Fibonacci stop-loss is not hit all that often.
-Neal Hughes “FibMaster”