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

Figure 5.31
Japanese Yen chart from 02–00 to 02–01. PHI-ellipse PHI08.
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PHI-ELLIPSES
upside, represented by PHI08, which is well established and def ined
by the starting point and two side points.
Examples like the short trades on PHI06 and PHI07 make it
clear that Fibonacci tools are ordinary trading tools. This means that
even on the best looking patterns, trades might turn out to be losing.
As long as traders work with a solid stop-loss rule, any harm done by
losing trades remains under control. To increase the prof itability of
investments, we recommend combinations of Fibonacci trading tools,
candlesticks, and chart pattern recognition.
PHI-Ellipses on S&P 500 Index Sample Data
Trading the PHI-ellipse is the sort of improved trading approach that
was described in Chapter 4. This approach works on every product,
stocks, stock indexes, f inancial futures, or commodities.
We do not think that trading signals with PHI-ellipses can be com-
puterized since the strength of the PHI-ellipse—adjusting dynamically
to every price move—is very diff icult to program. However, the sophis-
ticated trader who has learned to adjust the PHI-ellipse to different
price moves can easily trade it by hand. Our Web site, www.f ibotrader
.com, provides a model portfolio with advice on how to trade the markets
using the PHI-ellipse.
In most cases, trading with the PHI-ellipse means trading
counter to the market trend direction, but occasionally the trades go
in line with the trend direction. In our long-term example on the S&P
500 Futures Index, we show some of these trades as well.
To trade systematically with the PHI-ellipse, we have to intro-
duce an entry rule, a stop-loss rule, and a trailing stop rule.
Under normal circumstances, we enter the markets counter to
the main trend direction. The entry rule is f illed when the outside
line of the PHI-ellipse and the most recent peak or valley are broken.
The peak /valley breakout condition is an amendment to the entry rule
described in Figure 5.13.
The reason for introducing the peak /valley breakout as an
amendment to the general rule is that the entry signals are often gen-
erated after a failure in the price move. The peak (on short entries) or
valley (on long entries) may show up before or after the market price
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