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

108
•
APPLICATIONS OF TRADING STRATEGIES
PHI-CHANNEL APPLICATIONS
Investors’ behavior is expressed not only in chart patterns, trend for-
mations, or sideways markets, but also in peaks and valleys. Every
peak or valley is an indication of what the majority of investors ex-
pect at any moment in time. Intraday peaks or valleys, however, are
not as meaningful as those on daily or weekly charts. Our analysis,
therefore, focuses on daily data, but it may easily be extended to sets
of weekly data.
Whenever traders are looking for a good entry point to buy long
or sell short, they want to come as close as possible to important turn-
ing points in the market. If they stay close enough to the market ac-
tion, the stop-loss level is not too far away from the entry point. On the
other hand, the prof it potential is big enough to participate in longer
market trends.
Trading Rules
Signif icant peaks and valleys in the markets are much more relevant
than often assumed. Trend channels are generated by establishing
major peak-to-peak and valley-to-valley connections out of regular
3-wave or 5-wave market moves. This is why trend channels should be
the primary step when analyzing markets.
PHI-channels are improvements over regular trend channels and
are generated slightly differently. Our PHI-channel analysis works
with baselines as connections of signif icant high-to-low and low-to-
high formations (see Figure 3.34 for a recap).
PHI-channels can be drawn either from impulse waves or from cor-
rective waves by determining the outside parallel line of a PHI-channel
on the basis of the next signif icant peak or valley to the right of the
baseline. As soon as a PHI-channel has been established, the width of
the PHI-channel measured as the distance from baseline to parallel line
can be multiplied by the ratios 0.618, 1.000, 1.618, 2.618, 4.236, and so
on (as shown in Chapter 3, Figure 3.35).
Depending on whether the baseline of the PHI-channel is trend
following (running from valley to peak) or countertrend (connecting
peak with valley), it is possible to draw PHI-channel trend lines 
or PHI-channel resistance lines in various distances from the out-
side parallel line of the PHI-channel. Combinations of PHI-channel
trend lines and PHI-channel resistance lines create a spiderweb 
c04.qxd 6/16/03 4:18 PM Page 108

---