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

Figure 4.38
Intel chart from 05–02 to 11–02. Rectangle formation daily.
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3-POINT CHART PATTERNS FOR TREND REVERSALS
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Finally, we recommend using a trailing stop rule, def ined simply
as the most recent peak or valley in a prof it. In the end, however, the
investor’s mentality toward risk will determine whether to use prof it
targets, trailing stops, or a combination.
Key-Reversal Days
Key-reversal days often occur at the end of a fast-moving market
either up or down.
We know from the analysis of the hammer candlestick chart pat-
tern that the overall statistics are poor for that particular pattern,
which is equivalent to a key-reversal day. Nevertheless, we concen-
trate on those key-reversal days that happen as third peaks or valleys
within a chart pattern.
A typical example can be seen in the daily chart of the largest
European software company SAP (see Figure 4.39).
Figure 4.39
SAP chart from 04–02 to 08 –02. Key-reversal day.
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APPLICATIONS OF TRADING STRATEGIES
Intel again provides an example; it shows a solid key-reversal
day pattern as a third peak in a triple top formation, this time late
in August 2000 (Figure 4.40).
The entry rule depends to a high degree on the risk preference of
the investor. An ideal pattern is the hammer candlestick chart forma-
tion, described in an earlier section. An easy rule of thumb is that the
shadow of the hammer should be at least three times the length of
the body.
The stop-loss is placed at the low of the key-reversal day for a
buy signal and at the high of the key-reversal day for a short signal.
Often on key-reversal days, we are already in a trading range at
the third peak or valley of a 3-point chart formation. For short-term
trades, we take the opposite side of the trading range as our f irst
prof it target and double the distance of the trading range as our sec-
ond prof it target.
Trailing stop rules are less important for key-reversal days and
short-term approaches to trading.