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

FIBONACCI PRICE EXTENSIONS
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within the price band (vice versa for long entries on price extensions
to the downside).
Both patterns are shown in Figure 4.18.
The market itself decides the pattern that is realized. The one
that shows up f irst will be f illed.
Whenever a market position (long or short) is established, a stop-
loss will protect it. The rule for short positions is to place the stop-
loss protection one tick above the highest high of the previous bars.
For long positions, the stop-loss rule is reversed: the stop-loss level is
set to one tick lower than the lowest low of the previous bar.
Figure 4.19 shows the stop-loss rule after a short signal.
Figure 4.18 Entry rules out of a price band at the target price line of an extension.
Figure 4.19
Stop-loss protection on a short position.
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APPLICATIONS OF TRADING STRATEGIES
In addition to stop-loss protection, a prof it target or a trailing
stop rule maintains prof its that accumulate on a position. The most
common rules for daily data are:
• Prof it target set to a 50 percent retracement of the previous 3-
wave move that formed the extension.
• Trailing stop def ined as a 3- to 4-day high / low breakout or a
breakout of the previous peak /valley.
Each of the aforementioned exit rules has its advantages and dis-
advantages, but it important to consistently stay with one rule.
Sample Calculations for Extensions on Daily Data
Because the Japanese Yen cash currency is a volatile product with
high market participation, it is useful for demonstrating basic trade
price extensions on daily data.
The following settings are used as our parameters in the Japa-
nese Yen cash currency:
• Minimum swing size of 1.80 JPY (a sample move from 110.00 to
111.80); entry rule at previous 2-day high on buy signals, and
previous 2-day low on sell signals.
• Price target calculated by multiplying the swing size of the f irst
impulse wave by the Fibonacci ratio 1.618.
• Prof it target 50 percent of the distance from impulse wave to
price target; trailing stop set to 4-day low on buys and 4-day high
on sells.
• Stop-loss level at highest high before entry on sells, and lowest
low before entry on buys.
Applying these parameters to a chart, we conduct the analysis
twice. We f ind four sample signals for the period from January to
November 2000 on daily data.
In the f irst setup, we exit prof itable positions as soon as 
the prof it target level is reached. The 50 percent prof it target level is
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