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

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PHI-ELLIPSES
We cannot def ine a standard PHI-ellipse that suits every product.
To work properly with PHI-ellipses as investment tools, we must iden-
tify the minimum length and the minimum thickness of relevant PHI-
ellipses for every product that we trade. Each product reveals its
characteristic price behavior in typical price patterns that we can iden-
tify only with historical charts.
The attached WINPHI software package is designed to backtest
Fibonacci tools on historical data. It would not be enough to analyze
any kind of historical data. It is important to analyze all of the his-
torical data with the same price scale.
A PHI-ellipse specific for a certain product can be identified only
when the price scale over the test period remains the same. This iden-
tif ication routine has to be done by hand with the aid of computer-
graphics capabilities.
Once the length and thickness of a typical PHI-ellipse for any
given product are identified over 10 years or more with a constant price
scale, the probability is high that investors can use this PHI-ellipse for
future trading.
PHI-ellipses tell us where we are in the market price action at
any point in time. Whenever a market trend reverses at the end of a
PHI-ellipse, we can take the f inal point of an old PHI-ellipse as the
beginning of a new one (see Figure 5.5).
New PHI-ellipses often start to develop as soon as price patterns
reach the end of old PHI-ellipses. This occurs especially when PHI-
ellipses have a steep upward or downward angle. Since PHI-ellipses
Figure 5.5
Attaching PHI-ellipses.
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BASIC FEATURES AND PARAMETERS OF PHI-ELLIPSES
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work best as countertrend investment tools, sideward markets provide
the most favorable price patterns.
Whenever market price action moves out of a PHI-ellipse be-
fore reaching the f inal point of the PHI-ellipse, either to the upside
or to the downside, we can assume a new market price pattern is be-
ginning that might f it into a new PHI-ellipse. In addition to attach-
ing PHI-ellipses, we may also find overlapping PHI-ellipses as shown
in Figure 5.6.
The slope of a PHI-ellipse is another parameter that traders
must not underestimate. This slope determines the prof it potential of
countertrend trading signals from market entry point to prof it target
(see Figure 5.7).