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

FIBONACCI PRICE CORRECTIONS
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The following parameters are used for the DJ EuroStoxx 50
Index simulation:
• Our correction level is 61.8 percent, the minimum swing size is
300 basis points (a sample move from 2,600.00 to 2,900.00).
• As an entry rule, we choose the previous 1-day high or low. In
case of false breakouts, we work with 2-day highs or 2-day lows.
• As a trailing stop, we work with a 3-day penetration. After a buy
signal, the stop-loss is below the low of the previous impulse wave
based on a daily close (vice versa for a sell signal).
Figure 4.15 shows a chart with 15 trading signals. To make it
easier to follow the chart, the same signals are summarized trade by
trade in Table 4.5.
Figure 4.15
DJ EuroStoxx 50 chart from 08 –01 to 08 –02. Simulation of trad-
ing signals based on corrections daily (EL: entry long, ES: entry short, XL: exit
long, SX: exit short; trading signals numbered consecutively from 1 to 15).
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APPLICATIONS OF TRADING STRATEGIES
Summary
Price corrections are important and prof itable Fibonacci-related trad-
ing tools as long as investors handle them properly.
The following considerations are essential when working with
price corrections:
• Consistency in the strategy.
• Different swing sizes and volatilities for different products.
• Magnitude of the f irst impulse wave from which the correction
level is measured.
• Strength of the market trend.
• Data compression (weekly, daily, or intraday data).
Table 4.5
Trading Signals
Profit/
Loss in
#
Entry Rule
At
Exit Rule