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

Fibonacci Retracement 61.8 Percent and Candlestick Patterns
Seven sample trading signals can be found in the S&P 500 Index,
again between December 2001 and April 2002 (see Figure 6.2).
Figure 6.2
S&P 500 chart from 12–01 to 04–02. Simulation of trading signals
based on plain price corrections daily in combination with candlesticks (EL:
entry long, ES: entry short, XL: exit long, XS: exit short, S-L: stop-loss, TS: trail-
ing stop).
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FIBONACCI PRICE CORRECTION LEVELS
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The trading signals in Figure 6.2, as combinations of Fibonacci
price corrections and candlestick chart patterns, are based on a sim-
ple set of parameters:
• Swing size of 30 basis points.
• Entry rule based on candlestick chart patterns after the Fi-
bonacci correction level 61.8 percent is reached.
• Stop-loss point at previous swing high or low.
• 3-day high or low trailing stop.
• Daily data; slippage and commission excluded.
The prof its and losses for corrections and candlesticks in combi-
nation look a bit more promising compared with the results of Fi-
bonacci price corrections as a stand-alone strategy. All seven trades
are shown in Table 6.2.
The main reason for the improved outcome of the simulation is
the change in the entry rule from entering the market immediately on
reaching the Fibonacci correction target to waiting for a candlestick
pattern that conf irms the trend direction.
The number of stop-losses is reduced and the total number of
trades is down from nine to seven.
Table 6.2
Trading Signals (HA : Harami Pattern, EN: Engulfing
Pattern, DC: Dark Cloud Cover, BH1: Bullish Belt-Hold, BH2:
Bearish Belt-Hold, PP: Piercing Pattern, ES: Evening Star)