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

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PHI-ELLIPSES
entry side because it is drawn at too high a ratio from the PHI series.
We exit our position at point K (Figure 5.28) when the market price
breaks through the sideline of PHI04.
PHI-ellipse PHI06 is an example of capturing a medium-term 3-
wave uptrend over three months and generating a short signal from it
(see Figure 5.29).
PHI06 is based on the symmetrical price move from points A to
B to C to D. The 3-wave swing has an a–b–c correction in wave 2,
which at the same time gives shape to PHI01 (see Figure 5.25).
Our basic investment decision is countertrend at point D. 
Two price goals X and X1 conf irm the trend reversal at point D. We
reach goal X by multiplying the amplitude of the price move from A
to A1 by the Fibonacci ratio 1.618. Price goal X1 is def ined by mul-
tiplying the amplitude of the market move from point A to point B by
the ratio 0.618. Both price targets X and X1 are close enough to-
gether to lead to strong resistance at these price levels and a high
probability of a trend reversal as soon the target prices are triggered
on the uptrend.
Figure 5.29
Japanese Yen chart from 04–00 to 11–00. PHI-ellipse PHI06.
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WORKING WITH PHI-ELLIPSES ON DAILY DATA
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To invest on PHI06, we have two more options. The relevant fac-
tors of the f irst option are:
• Immediate entry short at point D on a previous 4-day low, due to
the conf irmation of the trend reversal by the price goals X and
X1, even if PHI06 has not been broken. The entry rule is f illed
at point E.
• Stop-loss protection set to the highest high at point D.
• Trailing stop to protect prof its def ined as a breakout of a previ-
ous 4-day high as long as the short position has not been stopped
out in a loss.
• Def inition of prof it target levels at 38.2 percent, 50.0 percent,
and 61.8 percent of the distance measured from points A to D al-
ternatively to the trailing stop exit rule.
The second option runs a little differently and delays the entry.
This is because we wait conservatively for the f inal point of PHI06.
We use the following set of parameters:
• Entry short on a previous 4-day low after the market move left
PHI06.
• Stop-loss protection set to the highest high inside PHI06.
• Trailing stop to protect prof its, def ined as a breakout of a pre-
vious 4-day high as long as the short position has not been
stopped out in a loss.
• Def inition of prof it target levels at 38.2 percent, 50.0 percent,
and 61.8 percent of the distance measured from points A to D al-
ternatively to the trailing stop exit rule.
It depends on the risk preference of investors whether an entry
on the double conf irmation of the trend reversal by two Fibonacci ex-
tensions is solid or whether sticking with the overall rule of first wait-
ing for the f inal point of PHI06 remains preferable.
With PHI07, the perspective once again broadens and shifts from
midterm to long-term analysis.
PHI07 is a splendid example of how investors can identify pat-
terns with PHI-ellipses and use pattern recognition over the short
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