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

Figure 4.25
Harami pattern.
Figure 4.26
Morning star and evening star.
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CANDLESTICK CHART PATTERNS
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body. The stop-loss is placed at the low of the small candlestick in the
middle of this pattern.
An evening star indicates a downtrend. We sell at the low of the
right black candlestick. The stop-loss is placed at the high of the small
candlestick in the middle of this pattern.
Sample Trading Signals
We show trading signals based on candlestick chart patterns for the
DJ EuroStoxx 50 Index between June and August 2002.
Three months is a short time span. However, it is suff icient for
demonstration purposes because candlestick charts need a lot of
space. This time period is identical with the Fibonacci price correc-
tion analysis presented earlier in this chapter, and later on, we com-
bine the two approaches. Figure 4.27 shows seven candlestick trades
over the three months under consideration.
Figure 4.27
DJ EuroStoxx 50 chart from 06–02 to 08 –02. Simulation of trad-
ing signals based on candlestick patterns daily (EL: entry long, ES: entry short,
XL: exit long, SL: stop-loss).
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APPLICATIONS OF TRADING STRATEGIES
The large market swings in the DJ EuroStoxx 50 Index mean
they work very well for analysis with candlestick charts. With smaller
market swings, candlesticks do not work as well. The same holds true
for Fibonacci analysis. Candlesticks and Fibonacci corrections have
much in common. In both strategies, the core principle is a focus on in-
vestor behavior.
Signal 1
The f irst signal is based on a harami pattern and is conf irmed in ad-
dition by a bearish engulf ing pattern.
The sell signal is at the low of the long white candlestick. Be-
cause the market opened with a price gap, the entry price is even lower
than the low of the long white candlestick.
Signal 2
The second trading signal is a long signal based on a bullish engulf-
ing pattern.
As there is no reversal signal, we get stopped out at the lowest
low of the bullish engulf ing chart pattern.
Signal 3
The third signal is a perfect hammer pattern. The candlestick body is
very small and the shadow is at least three times longer than the body.
We buy at the opening of the day following the hammer candle-
stick pattern.
Signal 4
After the long white candlestick body, we identify a harami pattern.
The bearish signal of the harami pattern is conf irmed by an inverted
hammer pattern, with a long shadow on the top and a small body at
the bottom.
We sell at the opening of the day that follows the harami pattern.
Signal 5
We get a reversal buy signal based on a bullish engulf ing chart
pattern.
We buy on the next day when the high of the candlestick with
the long white body is broken.
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