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

Figure 4.21
Calculation of Fibonacci price target in a regular 5-wave move.
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APPLICATIONS OF TRADING STRATEGIES
By combining the two calculations, using ratios 0.618 and 1.618,
we can precalculate the end of wave 5 at the same price if the market
moves in a regular price pattern as described.
Most of the time, however, instead of f inding one and the same
price level calculated with both ratios, we get two different prices,
They are either closer together or wider apart from each other, de-
pending on the amplitude of wave 1 and wave 3. We f ind an upper and
lower price target called a Fibonacci price target band.
We cannot know whether our price forecast will ever be reached,
But we know in advance whether the price band will be close together
or far apart. When the upper and the lower levels of the Fibonacci
price target band are close together, the price target band is worth
considering.
With the example of Japanese Yen cash currency shown in Figure
4.22, we show how to calculate a Fibonacci price band. Beginning with
the high of wave 1 at 110.03 and the corresponding low at 107.72 mul-
tiplied by 1.618, we reach a price target of 103.99. The conf irmation
Figure 4.22
Japanese Yen chart from 03–00 to 07–00. Price target corridor cal-
culated using the Fibonacci key ratios 1.168 to 0.618.
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CANDLESTICK CHART PATTERNS
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from the high of wave 1 to the low of wave 3, multiplied by 0.618, leads
us to the second price target at 104.08.
The resulting Fibonacci price band is extremely narrow and is an
ideal example of what we are looking for in the markets. The Japanese
Yen cash currency dropped to 103.94 and then immediately reversed
its trend direction to the upside.
Summary
Investing based on extensions always means investments against the
main trend, which is def ined by the f irst impulse swing in a 3-wave
move or a 5-wave pattern.
Extensions are important Fibonacci trading tools because they
not only show up in fast movements over a couple of days or weeks in
soft commodities, but also indicate major trend changes in f inancial
instruments, derivatives, or currencies.
The most important modification to the general calculation of ex-
tensions out of the 3-wave movement is the additional use of 5-wave
patterns to get a multiple conf irmation of a Fibonacci price target in
a price band.
The successful combination of two Fibonacci-related tools is only
one step toward using other Fibonacci trading tools that can identify
turning points in the markets.