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

FIBONACCI PRICE CORRECTION LEVELS
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169
Figure 6.1 and Table 6.1 show the resulting sample trading
signals.
Table 6.1
Trading Signals
Profit/
Loss in
#
Entry Rule
At
Exit Rule
At
Points
1
Sell short
1,149.00
Stop-loss
1,174.00
(25.00)
2
Buy long
1,138.00
Stop-loss
1,115.00
(23.00)
3
Sell short
1,117.00
Buy reverse
1,099.00
18.00
4
Buy reverse
1,099.00
Stop-loss
1,081.00
(18.00)
5
Sell short
1,106.00
Buy reverse
1,097.00
9.00
6
Buy reverse
1,097.00
Stop-loss
1,076.00
(21.00)
7
Sell short
1,105.00
Stop-loss
1,125.00
(20.00)
8
Sell short
1,121.00
Stop-loss
1,133.00
(12.00)
9
Buy long
1,113.00
Stop-loss
1,100.00
(13.00)
Figure 6.1
S&P 500 chart from 12–01 to 04–02. Simulation of trading signals
based on plain price corrections daily (EL: entry long, ES: entry short, XL: exit
long, XS: exit short, S-L: stop-loss).
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170
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CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
The results of the simulation look discouraging. The main reason
for the high number of losing trades is the immediate market entry any
time that a 61.8 percent retracement level is reached. Our analysis
shows that the probability for a trend change at the retracement level
is not high enough for trading this strategy. Nevertheless, it is impor-
tant to note that earlier investments at retracement levels of 50.0 per-
cent or 38.2 percent would have worsened the picture because the
stop-loss points would have been farther away from the entry levels.
To tackle the problem, we combine a Fibonacci correction level
61.8 percent and candlestick chart patterns.