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

Figure 3.8
Calculation of Fibonacci price target in a regular 5-wave move.
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FIBONACCI ANALYSIS
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upper and lower levels are close together in relation to the underlying
swing size of the initial move of the f irst impulse wave.
PHI-Ellipses
The PHI-ellipse is an almost unknown trading tool that is closely re-
lated to the Fibonacci ratios. This tool surrounds price moves and
makes investors’ behavior visible for analysis on any kind of data.
Because swing formations are easy to identify and integrate into
computerized trading environments, traders or managers investing in
smaller accounts often use peak-and-valley formations. Many profitable
trades are possible, as long as there are regular wave patterns and each
impulse wave def ines new highs or new lows by a wide margin.
In multiple corrections with many false breakouts, however,
swing systems have little use because exogenous factors like slippage
and commission can consume all of the system’s small prof its.
Adding the time element to the analysis of market moves imme-
diately changes the conditions by filtering out noise and increasing the
stability of investment strategies. This is where PHI-ellipses come in.
Working with PHI-ellipses can be difficult. The basic structure is
simple, but because price patterns may change over time, the f inal
shape of a PHI-ellipse also may vary. What makes PHI-ellipses so in-
teresting is that they can identify underlying structures of price moves
and can circumvent price patterns. When a price pattern changes, the
shape of the PHI-ellipse circumventing the respective market price
pattern changes, too. We f ind long and short PHI-ellipses, fat and thin
PHI-ellipses, and even PHI-ellipses that are f lat or have a steep angle.
There are very few market price moves that do not follow the pattern
of the PHI-ellipse.
PHI-ellipses are related to the Fibonacci ratio. Generally speak-
ing, the ratio of major axis A to minor axis B defines the shape of an el-
lipse. Ellipses are turned into PHI-ellipses whenever the ratio of major
axis to minor axis is a member number of the PHI series. To make PHI-
ellipses work as devices for chart analysis, we have applied a (propri-
etary) transformation to the mathematical formula that describes the
shape of the ellipse. We still consider the ratio of the major axis A to the
minor axis B of the ellipse, but in a Fischer-transformed way.
PHI-ellipses are instruments for investments that represent a
countertrend to market actions. Thus, we observe whether a price move
stays within a PHI-ellipse and invest accordingly if a price move breaks
out of a PHI-ellipse at the very end. To draw a PHI-ellipse correctly,
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