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

Figure 6.13
S&P 500 chart from 05–02 to 11–02. Long-term turning points.
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CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
Once the double bottom is made, our entry rule applies. The
breakout of the outside line of the PHI-ellipse conf irms the trend re-
versal. The buy signal is f illed market on open on the day of the
breakout.
Summary
Trading the Fibonacci correction levels 38.2 percent, 50.0 percent, and
61.8 percent successfully depends on several factors. The biggest ques-
tion is the swing size a trader is working with. If the swing size is
large, the correction level 38.2 percent might be appropriate.
However, if the swing size is too large, we might get a trade only
once or twice a year. If the swing size is too small, we might get too
many trading signals. The easiest way to f ind a good swing size on
the products we want to trade is to look at sideward markets on his-
torical data. The profitability of the approach also depends on whether
we work with daily or intraday data.
For daily data, we recommend trading the 61.8 percent correction
level if a trader has the patience to wait for this level to be reached.
However, as our examples on S&P 500 Index data indicate, there might
be times when looking for the correction levels is not good enough.
What is needed is also an entry rule to conf irm the trend change. In
addition, it is always important to work with a stop-loss.
The integration of candlestick charting signif icantly improves
the results. On the other hand, candlesticks suffer the disadvantage
that we do not always f ind a valid candlestick pattern when our fa-
vorite retracement level is triggered (meaning that we miss trades).
The best trading strategy while working with 61.8 percent cor-
rection levels is a combination of entry rule and 3-point chart patterns,
as demonstrated in our examples. The 3-point chart patterns are al-
ways there and are always reliable. The chart examples on Microsoft
and Allianz are proof that this approach can be easily applied to stocks
or any other product with a trending market pattern and enough
volatility at a good swing size.
The biggest problem for a trader is to wait for the 61.8 percent
correction level; the market price comes close but does not reach it,
and then moves in the opposite direction. The trader has anticipated
the price correction properly, but misses a big prof it opportunity, be-
cause of working with a 61.8 percent correction level. To solve this
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