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

Figure 3.20
Morning star and evening star.
c03.qxd 6/17/03 11:46 AM Page 31

---

32
•
BASIC PRINCIPLES OF TRADING STRATEGIES
Trend changes are much more visible on candlestick charts than on
regular bar charts.
CHART PATTERN ANALYSIS
Analysts, investors, and traders often ask how to determine where a
trend comes to an end. The Fibonacci trading tools and the candle-
stick patterns provide two signif icant ways to answer this question.
Chart patterns are a third method for analyzing trends.
We try to integrate Fibonacci trading tools, candlestick patterns,
and chart patterns because, as mentioned, they are all based on the
most important element that moves the markets: investor behavior.
The study of chart patterns has gone on for at least a century,
and analysts have written many excellent books about this topic over
the past decades. Today, many traders prefer to focus on technical in-
dicators that are computer driven and are based on complex mathe-
matical formulas. But computer models have yet to prove that they can
consistently outperform pattern recognition as an analysis approach.
The following chart patterns are well known, have a high ana-
lytic value, and can be combined with other trading tools described in
this book.
Selected Reversal Chart Patterns
The most common reversal chart patterns share three characteristics:
1. They form at the end of an uptrend or downtrend.
2. The bigger the chart formation, the bigger is the following
reversal.
3. In general, chart formations on tops are shorter and have a big-
ger volatility than bottom formations.
Double Top and Double Bottom
The most common chart patterns are double top and double bottom
formations. Since double tops and double bottoms occur frequently in
small price moves, their forecasting value is somewhat limited. The
reliability of double top and double bottom formations increases with
the selection of bigger underlying swing sizes.
c03.qxd 6/17/03 11:46 AM Page 32

---