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

Figure 6.21
S&P 500 chart from 11–01 to 11–02. Trend changes based on sup-
port and resistance lines.
Figure 6.22
Nasdaq 100 chart from 11–01 to 11–02. Trend changes based on
support and resistance lines.
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SUPPORT AND RESISTANCE LINES
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If we combine the results generated by using the Fibonacci ratios
with the price levels retrieved from the support or resistance lines,
the overlapping price targets are astonishing. Whereas the resistance
and support lines are based on peaks and valleys way back in the past,
the price targets calculated with the Fibonacci ratios are projections
into the future.
The test runs shown on the three chart examples are performed
on a very short period of time and can only suggest how well the con-
cept may work in future trading. This simple concept, based on sup-
port and resistance lines and peaks and valleys, will perform well on
any product without optimization as long as there are volatile and
trending markets.
Figure 6.23
Dax 30 chart from 11–01 to 11–02. Trend changes based on sup-
port and resistance lines.
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CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
Support and Resistance Lines as Profit Targets
Support and resistance lines are reliable indicators of trend changes,
so why not use them to determine secure prof it target levels? If the
trading signal results from a breakout of the resistance line or the
support of a trend channel, doubling the size of the previous price
band gives a good price target. This prof it target rule was applied
throughout Chapter 4 when discussing 3-point chart patterns (see
Figure 4.30d for a recap).
The width of a trend channel is the distance from resistance line
to support line of the channel. If the trading signal is generated coun-
tertrend at the support line of a trend channel, the resistance line can
be the f irst prof it target. The second prof it target is twice the width
of the trend channel (vice versa for countertrend trading signals at
the resistance line of a trend channel).
The rest of this section explains options that traders have for tak-
ing prof its. We concentrate on support and resistance lines and /or
trend channel lines because these lines have proven reliable.
Furthermore, we stick with the concept of using the magic
three peaks or valleys in 3-point chart patterns. Three points are
the only requirements to trade successfully—as long as traders have
the patience and the discipline to follow the entry and exit rules
based on this principle.
To cover different markets and trading situations, we have se-
lected f ive examples that are typical of different market segments.
Among the f ive sample products are three stocks (IBM, Deutsche
Telekom, Intel), one cash currency (Japanese Yen), and a stock index
future (Dax 30 Index). They all can be analyzed in a similar manner.
IBM Sample Trade
Our f irst chart example is IBM. We show the breakout, out of a rec-
tangle. Once we have entered the market, it is important to predef ine
a point at which the position is to be closed. In the end, we are look-
ing for two exit levels, one in negative territory and one in positive
territory.
Our entry rule, based on the rectangle, is f illed at a price level
of 74.30 USD. If we double the width of the rectangle, this simple rule
leads to a prof it target level of 82.50 USD.
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