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

SUPPORT AND RESISTANCE LINES
•
201
Figure 6.24 shows the IBM trade for entry rule, stop-loss rule,
and prof it target rule based on a resistance line in double-width dis-
tance from the rectangle.
The sample trade makes our trading approach clear. We are look-
ing for safe entry signals with a prof it target that has a high proba-
bility of being reached. A rectangle as shown on the chart is a common
3-point pattern and is easy to recognize.
Deutsche Telekom Sample Trade
Figure 6.25 deals with the German large-cap stock Deutsche Telekom.
When the descending triangle is broken at 9.80 EUR, the resistance
line at 13.00 EUR def ines the prof it target. The resistance line runs
parallel to the support line at 8.25 EUR. The short-term trader closes
Figure 6.24
IBM chart from 04–02 to 11–02. Sample trade.
c06.qxd 6/16/03 4:11 PM Page 201

---

202
•
CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
the position and takes a prof it at 13.00 EUR. This represents a prof it
of about 30 percent in a short period of time.
If we double the distance from the signif icant high on the trian-
gle line in August 2002 to the lowest low of the descending triangle in
October 2002, the next important profit target can be precalculated at
a level of 17.55 EUR.
It is interesting to observe that the prof it target resistance line
at 17.55 EUR is almost identical with the two signif icant peaks that
were formed between February and April 2002.
However, we can also draw a resistance line at 16.25 EUR, based
on the peaks and valleys in January and April 2002. Which of the two
resistance lines is the correct one, future price action will show. Most
likely, market pricing will come up with a trading range between the
two resistance lines.