Candlesticks, Fibonacci, and Chart Pattern Trading Tools : a synergistic Strategy to Enhance Profits and Reduce Risk

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PHI-ELLIPSES
As mentioned, other charting programs have ellipses as well. We
have worked with PHI-ellipses for more than 20 years in real-time
trading and had to transform the underlying formula for the regular
ellipse into the PHI-ellipse formula to make this trading tool work.
The main difference between the PHI-ellipse and other ellipses is that
the PHI-ellipse keeps its shape much longer. In addition, PHI-ellipses
always integrate a Fibonacci ratio; other ellipses do not do this.
Entry Rules
When we generate trading signals with the PHI-ellipse, our entry sig-
nal is the outside line of the PHI-ellipse, which is the parallel to the
median line of the PHI-ellipse.
Alternatively, conservative traders should wait until a price bar
breaks the outside line of the PHI-ellipse. The high or low of the
price bar at which the breakout occurred is then the entry point (see
Figure 5.38).
This additional requirement means that we will always be a lit-
tle bit later in the market than if we had bought or sold immediately
on the breakout, but on the other hand, we eliminate a lot of false
signals.
Stop-Loss Rules
Every product has its own volatility and, therefore, requires a differ-
ent stop-loss rule.
In general, if we work with a horizontal PHI-ellipse, the stop-loss
can always be the median line of the PHI-ellipse.
Figure 5.38
Entry rule on a short position.
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WORKING WITH PHI-ELLIPSES ON INTRADAY DATA
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As an option, we can work with a stop-loss expressed in basis
points. For example, in the Dax 30 Index, we recommend a stop-loss of
30 basis points.
The third option would be to start with the stop-loss at the me-
dian line and wait to see whether the market price reaches a new peak
(on short positions) or valley (on long positions). We then reduce (or
raise) the stop-loss to this new level, as illustrated in Figure 5.39.
Profit Target Rules
The best way to define a profit target is to wait after the market entry
until near the end of the trading session, and then close the position
f ive minutes before the end of the session.
As an alternative, we can close the position when the market
price reaches a prof it target that, pointwise, is as big as the height of
the PHI-ellipse that generated the trading signal (see Figure 5.40).