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

Figure 3.4
Parthenon temple in Athens. 
Source: The New Fibonacci Trader
Workbook,
by Robert Fischer (New York: Wiley, 2001), p. 7.
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BASIC PRINCIPLES OF TRADING STRATEGIES
patterns than impulse waves in the commodities, futures, stock index
futures, stocks, or currency markets. Markets move sideways for a
longer period than an impulse wave appears.
We can never predict which of the next waves will be an impulse
wave instead of another false move in continuation of a sideways
market. Therefore, every serious trading approach using corrections
has to be designed to survive even the longest sideways market cor-
rection phase.
No market pattern can assure a prof itable trade. At any time, we
can be in a correction of an impulse wave or at the beginning of a new
impulse wave.
Trading with corrections is a trend-following strategy. It is based
on the assumption that after a correction of an impulse wave up or
down, the next impulse wave will follow in the direction of the first im-
pulse wave after the correction is f inished. Thus, we generally expect
a minimum of a three-swing price move, and in many cases, this as-
sumption is correct. Therefore, working with corrections is a valid in-
vestment strategy, and it is discussed in detail later in this book.
Corrections work equally well long or short, to the upside or downside
of the markets. The worst thing that can happen in trending markets
is that the market may run away without correcting enough and with-
out leaving a valid signal. Markets moving sideways involve the risk
of the trader getting stopped out in a streak of losing trades if the
strategy’s parameters are too restrictive.
Trading with corrections is a short-term strategy. The goal is to
have many trades, of which a large number are prof itable. Likewise,
there should be a low number of losing trades, and these should be
small losses.
Corrections are closely related to the Fibonacci ratios through
the swing size and the volatility of a product. Which ratio to choose de-
pends on the product and the time intervals selected. Weekly data
might need different ratios from daily or intraday data. The safest way
to f ind the best ratio for products and time spans is to test them on
historical data with a computer.
The most common approach to working with corrections in re-
search and practical trading is to relate the size of a correction to a
percentage of a prior impulse wave.
For Fibonacci’s PHI, the following prominent percentages of pos-
sible market corrections can be derived directly from the ratios 0.618,
1.000, and 1.618 of the PHI series:
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