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

Figure 6.9
S&P 500 chart from 05–02 to 09–02. Correction levels in combina-
tion with candlesticks.
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FIBONACCI PRICE CORRECTION LEVELS
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We get a buy signal at the high of the day with the hammer can-
dlestick pattern and on the breakout of the resistance line. The most
recent valley before the long entry determines the stop-loss.
Instead of combining Fibonacci price corrections with candle-
stick patterns or 3-point chart patterns, traders can also merge them
with Fibonacci extensions, support and resistance lines, and PHI-
ellipses in an integrated Fibonacci-related approach.
Fibonacci Corrections and Multiple Fibonacci Tools
Trading signals based on Fibonacci corrections become more valid as
more tools conf irm a turning point in the market. All Fibonacci trad-
ing tools are devices for ref lecting investor behavior. That is why it is
easy to combine them.
We are looking for clusters of conf irmations of trend reversals.
To get the full picture, we add Fibonacci extension levels as well as
support and resistance lines to our starting trading device, the Fi-
bonacci price corrections.
The three main Fibonacci retracements 38.2 percent, 50.0 per-
cent, and 61.8 percent are nothing more than the converted Fibonacci
ratios 0.618, 1.000, and 1.618. When looking for trend changes, we can
combine the calculations if the necessary swing sizes exist (see Fig-
ure 6.10).
Figure 6.10
Price band based on Fibonacci correction and Fibonacci extension
combined.
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182
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CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
Many combinations of Fibonacci price corrections and extensions
are possible. The rationale behind the calculation of the target prices
that determine the price band is the following:
• The correction level calculated using the Fibonacci ratio 61.8
percent is reached just below point C. If we take the distance be-
tween point B and point 1 and multiply it by the Fibonacci ratio
1.618, we reach a price target that is a little bit above point C.
• The precalculated price targets often do not overlap completely.
As long as the price band formed by the target prices is very nar-
row, we f ind an ideal Fibonacci target level, for the price target is
calculated twice by the Fibonacci f igures 1.618 and 61.8 percent.
Figure 6.11 is a bar chart example of the S&P 500 Index between
November 2001 and November 2002 that combines Fibonacci price
corrections and extensions.