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

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CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
comes into effect after swing highs or swing lows are broken and the
market price moves back into the trading range.
Looking back to the immediate entries on price corrections in the
f irst example of the section (Figure 6.1 and Table 6.1), we can now re-
examine the trading signals according to underlying price patterns
that would have prevented us from entering the market too early:
• Signal 2 failed when the market price formed a double top.
• Signal 4 failed when the market price formed a double bottom.
• Signal 7 failed when the market price formed a triple bottom.
• Signal 8 failed based on a quadruple top.
• The low of signal 9 followed a triple top.
The integration of 3-point chart patterns and a backward look
entry rule have a positive effect on the trading results in combination
with Fibonacci price corrections of 61.8 percent.
The 3-point chart patterns are a stable element of trading the
markets and should be watched carefully, whereas swing size and
reentry rule may vary from product to product. Hardly any other in-
vestment tool can monitor the investor behavior as accurately as reg-
ular 3-point chart patterns.
Now that we have discussed the S&P 500 Futures Index on three
different approaches to analyze the Fibonacci retracement level 61.8
percent, we want to add two stocks, Microsoft (member of the Dow
Jones 30 Index) and Allianz (member of the Dax 30 Index).
In contrast to Microsoft, which moves in a trending pattern, Al-
lianz is stuck in a sideward market. Not surprisingly, the number
of trades is much smaller in a trending market. Microsoft shows
6 trades in 12 months, whereas Allianz comes up with 12 trades in
just 6 months.
The latter f inding is typical of the kind of strategy we present.
Because we never know future market patterns in advance, we have
to take every trade.
As discussed in Chapters 3 and 4, the most crucial parameter—
in addition to the 61.8 percent retracement level—is the swing size.
The swing size of a trading product can only be determined from test
runs on historical data. However, conducting test runs is not difficult
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