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

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APPLICATIONS OF TRADING STRATEGIES
When the four sample trades are analyzed signal by signal, it be-
comes clear that trading price extensions can be a prof itable strategy.
Trading signals are infrequent, but the four occasions where market
patterns were in accordance with our parameter settings offered con-
vincing trading opportunities in the Japanese Yen cash currency.
Nevertheless, it is diff icult to decide on the appropriate exit rule.
Both options—exiting immediately on the profit target level, and wait-
ing a little longer for the trailing stop pattern to close the position—
paid off equally well. Interested readers can test both patterns on
different sets of data, and within different time frames, to determine
their personal preference.
Extensions out of 3-wave moves are the easiest patterns to iden-
tify, which is why we used this simple pattern in our introductory
section.
In practical trading, however, most of the time, we must deal
with multiple wave counts. Elliott based his principles on a 5-wave
pattern, which is a static approach, but in strong bull or strong bear
Figure 4.20
Japanese Yen chart from 01–00 to 11–00. Simulation of trading
signals based on price extensions daily (EL: entry long, ES: entry short, XL: exit
long, SX: exit short, S-L: stop-loss, PT: profit target, TS: trailing stop).
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FIBONACCI PRICE EXTENSIONS
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markets, we often f ind 10 or more waves in the same trend direction.
Normally, the wave count will not exceed 5 waves.
Price Extensions in 5-Wave Patterns
When analyzing extensions in 5-wave patterns, we look for an addi-
tional parameter, based on the Fibonacci summation series that will
conf irm our price target calculation for extensions out of a 3-wave
pattern.
As explained earlier, to analyze a 3-wave pattern, the investor
must multiply the size of the f irst impulse wave by the Fibonacci ratio
1.618. The product is then added to the swing size of the initial move
to calculate a Fibonacci price target line. It is at this line that we ex-
pect the third wave to reverse.
Because there are usually more than three waves in a trending
market, we must modify our approach to calculating a Fibonacci price
target. The most common price pattern has at least f ive waves—three
impulse waves and two corrective waves.
Figure 4.21 illustrates the basic approach to calculating price
targets for extensions out of 5-wave market movements.
In a regular 5-wave move in an uptrend, the price target line for
the end of wave 5 is calculated by multiplying the amplitude of wave 1
by the Fibonacci ratio 1.618, and then multiplying the amplitude from
the bottom of the wave to the top of wave 3 by the reciprocal value to
the Fibonacci ratio 0.618.