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

At
Points
1
Buy long
3,495.00
Sell f lat
3,574.00
79.00
2
Buy long
3,678.00
Sell f lat
3,729.00
51.00
3
Buy long
3,671.00
Sell reverse
3,819.00
148.00
4
Sell reverse
3,819.00
Buy reverse
3,624.00
195.00
5
Buy reverse
3,624.00
Sell reverse
3,797.00
173.00
6
Sell reverse
3,797.00
Buy reverse
3,649.00
148.00
7
Buy reverse
3,649.00
Sell reverse
3,736.00
87.00
8
Sell reverse
3,736.00
Buy f lat
3,567.00
169.00
9
Sell short
3,725.00
Stop-loss
3,801.00 
(76.00)
10
Buy long
3,628.00
Sell reverse
3,707.00
79.00
11
Sell reverse
3,707.00
Buy f lat
3,534.00
173.00
12
Buy long
3,052.00
Sell f lat
3,073.00
21.00
13
Sell short
2,670.00
Buy reverse
2,540.00
130.00
14
Buy reverse
2,540.00
Sell reverse
2,663.00
123.00
15
Sell reverse
2,663.00
Stop-loss
2,800.00
(117.00)
c04.qxd 6/16/03 4:17 PM Page 66

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FIBONACCI PRICE EXTENSIONS
•
67
Even more important is that corrections can be computer-
programmed and tested on historical price data. This makes it easier
for traders to analyze different products at the same time to achieve
better diversif ication.
To conclude this section, we present some test results on a variety
of stocks, one stock index future, and one cash currency (see Table 4.6).
FIBONACCI PRICE EXTENSIONS
Price extensions are volatile price movements that result from run-
away markets. Usually, price extensions occur when unexpected news
reverses the trend direction.
This discussion of price extensions is subdivided into two parts:
price extensions in 3-wave patterns, and price extensions in 5-wave
patterns.
Price Extensions in 3-Wave Patterns
Extensions take place primarily in the third wave of a 3-wave price pat-
tern. In an uptrend, the correction does not go lower than the bottom of
wave 1, whereas in extensions out of a bull trap or bear trap formation
of irregular tops or bottoms, the correction can go higher than the high
of the first impulse wave or lower than the low of the first impulse wave,
respectively.
Table 4.6
Selected Computer Test Results
Profit/
Max
Loss in
Wins
DD in
Product
Period
EUR
#
%
EUR
766400 Volkswagen
1996
+
13,438.00
14
50
(9,373.00)
870737 Nokia
1996
+
20,850.00
11
54
(7,243.00)
940602 Philips
1996
+
20,993.00
9
56
(5,165.00)
840400 Allianz
1996
+
15,302.00
8
38
(3,956.00)
723610 Siemens
1996
+
15,077.00
12
33
(8,206.00)
Dax 30 Futures Index
1996
+
31,532.00
36
44
(17,437.00)
USD/JPY
1996
+
26,250.00
6
66
(21,430.00)
c04.qxd 6/16/03 4:17 PM Page 67

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68
•
APPLICATIONS OF TRADING STRATEGIES
Two basic chart formations for price extensions are illustrated in
Figure 4.16.
Exploring extensions means investing against major trend di-
rections. Investors looking for quick profits by taking advantage of im-
balances in the marketplace need to know not only when to enter a
position in advance, but also when to exit it.
Calculating price targets in extensions of the third wave out of
a 3-wave chart formation requires the following steps:
• Def ining a minimum swing size and setting it to the size from
peak to valley (or valley to peak) of the f irst impulse wave of the
3-wave pattern.
• Multiplying the swing size by the Fibonacci ratio 1.618.
• Adding the resulting value to the size of the initiating swing to
def ine the price target.
Figure 4.17 illustrates the three-step approach to calculate Fi-
bonacci target prices for extensions.