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

PHI-CHANNEL APPLICATIONS
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design for mapping market price action and predicting future mar-
ket moves.
In a trending market with more than three waves upward or
downward, the baseline is adjusted to the most recent high in an up-
trend or the most recent low in a downtrend. The outside line has to
be adjusted to the peak or valley on the right side.
Entry signals on PHI-channels are generated when the outside
line of the PHI-channel and the most recent peak or valley are broken
(Figure 4.45).
This simple concept works well to def ine long or short market en-
tries in many markets and products because the entry signals are gen-
erated after a failure in the price move.
The peak or the valley that turns out to be a failure can occur
either before or after the outside line of the PHI-channel is broken.
We receive a valid entry signal in both cases.
The stop-loss level, as discussed throughout this chapter, is the
most recent peak or valley in a loss after the sell signal or buy signal
has been generated. This rule is illustrated on a short position in Fig-
ure 4.46.
Figure 4.45
Entry rule to establish a short position.
Figure 4.46
Stop-loss rule on a short position.
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APPLICATIONS OF TRADING STRATEGIES
Once we are stopped out, we have to wait for a new entry point.
Figure 4.47 illustrates how to reenter the market.
Most signals are reversal signals. Once we get stopped out, we
have to wait until the market moves out of the trading range. We buy
or sell as soon as the closing price trades above (or below) the peak (or
valley) that marks the upper (or lower) border of the trading range.
The trailing stop is again easy to explain and easy to understand.
We work with the most recent peak on short positions) or valley (on
long positions) in a prof it. After the trailing stop is triggered, we have
to wait for a new PHI-channel and a failure to get an entry signal.
For a trading example that is a convincing application of the PHI-
channel rules, we have chosen the S&P 500 Index over more than a
year, between July 2001 and November 2002. Using just 16 months
and only one product provides a limited sample for generalizations
about the quality of the trading approach. However, the tested time
frame contains uptrends, downtrends, and sideward markets; and,
therefore, it clearly indicates the trading potential of the PHI-channel
approach.
Trading Example
Trading PHI-channels is appealing because they always stay close to
the market action. PHI-channels work best on volatile products such
as stock index futures, f inancial futures, cash currencies, or volatile
commodities. The approach is easy to follow, but traders must be dis-
ciplined to execute the trading signals.