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

Figure 4.42
Japanese Yen chart from 02–02 to 06–02. Pattern of three falling
peaks.
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3-POINT CHART PATTERNS FOR TREND REVERSALS
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in a prof it (short positions) or sell f lat at the most recent valley in a
prof it (long positions).
Symmetrical, Ascending, and Descending Triangles
Triangles are the final 3-point chart pattern in this discussion. In sym-
metrical triangles, support and resistance lines merge. Symmetrical
triangle tops have prices that trend up to the formation, whereas bot-
toms have prices leading down. To cite Bulkowski and his f indings
again, premature breakouts occur about 71 percent to 76 percent of
the way to the triangle apex. A downsloping trend line drawn along the
tops connects minor highs, while an upsloping trend line supports the
minor lows. In Bulkowski’s test runs, there are twice as many trian-
gles with upward breakouts as with downward ones.
The Deutsche Telekom stock chart (Figure 4.43) shows a sym-
metrical triangle.
With this entry rule, we always wait for a breakout of the mar-
ket. We check the price pattern for at least three peaks or valleys
Figure 4.43 Deutsche Telekom chart from 07–01 to 04–02. Symmetrical triangle.
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APPLICATIONS OF TRADING STRATEGIES
touched by the support or resistance line. The breakout has to occur
right through either the support or the resistance line.
If we see a breakout to the downside (short entry), we place the
stop-loss at the triangle high. If we see a breakout to the upside, we
place the stop-loss at the triangle low.
Doubling the distance from highest high to lowest low of the sym-
metrical triangle once more facilitates the prof it target rule. For the
relevance of prof it targets (on a rule that is similar to the one used
here), Bulkowski reports a rate of 62 percent realized profit targets on
downside breakouts and 81 percent realized prof it targets on break-
outs to the upside.
Finally, for trailing stops, we buy f lat at the most recent peak in
a prof it (short positions) or sell f lat at the most recent valley in a
prof it (long positions).
Descending triangles—in contrast to symmetrical triangles—
have a horizontal trend (or support) line and a downsloping resistance
line. Ascending triangles have a horizontal resistance line and an up-
sloping trend (or support) line.
Triangles of the ascending or descending kind are easy to iden-
tify. Following Bulkowski, we find far fewer descending triangles than
ascending ones. Almost two out of three (422 out of 689) triangles that
Bulkowski identif ied were consolidations of the current trend. This
means that if the price trend is downward going into the triangle, it is
still moving downward after leaving it. Furthermore, almost three out
of four ascending triangles show a meaningful rise after an upside
breakout. Again, we call this sort of 3-point chart pattern a “contin-
uation pattern.”
Breakouts of the support or the resistance line forming the
triangle are indications of valid market entries. In all cases, we wait
for the occurrence of at least three peaks on the resistance line or
three valleys on the support line.
The stop-loss point is marked by the support line on buy signals
and by the resistance line on sell signals. As a rule of thumb, the line
opposite to the direction of the market entry always marks the rele-
vant stop-loss point.
Prof it target rules and trailing stop rules are similar to the ones
for symmetrical triangles. For the prof itability of prof it targets,
Bulkowski reports 89 percent of ascending and 67 percent of descend-
ing triangles meet precalculated price targets.
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