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
Whereas working with Fibonacci corrections means having a
high and a low point and looking for possible correction levels in price,
working with extensions means the opposite. We have a price swing
from point A to point B as described in the previous section and want
to know how far the market price might go before it runs into resis-
tance levels.
Calculating Price Targets
Inexperienced Fibonacci traders may f ind these calculations con-
fusing; the purpose of the chart provided in Figure 6.14 is to pre-
vent readers from getting lost in the jungle of corrections and
extensions. The chart shows the S&P 500 Index between May and
November 2002.
The swing from point A to point B is the basis for our calculation.
We calculate the three price targets for extensions by using the ratios
Figure 6.14
S&P 500 chart from 05–02 to 11–02. Price targets.
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FIBONACCI PRICE EXTENSIONS
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0.618, 1.000, and 1.618. Figure 6.14 also shows the three correspond-
ing price targets for market corrections at levels of 38.2 percent, 50.0
percent, and 61.8 percent.
If the market does not go higher than the high in point C and
makes a new peak there, we have to recalculate our price targets up
and down based on the new initial swing from point A to point C.
Our main aim is to f ind price clusters, or multiple conf irmations
of price targets, at which major trend reversals can be expected. The
following three-step approach in the S&P 500 Index between July 2001
and November 2002 starts with the extension levels, continues with
the correction levels and, finally, brings them both together to come up
with price bands formed by price extensions and price corrections.
Figure 6.15 contains three important price extension levels in
the S&P 500 Index, calculated at Fibonacci ratios 0.382, 1.618, and
1.000 based on the initial swing from points B to C.