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

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CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
which to calculate turning points. On daily data, in contrast, we re-
ceive enough swing highs and swing lows, but we may get too many
signals. The number of trading signals can be even greater for intra-
day data.
Using the Fibonacci tools in combination with candlesticks and
3-point chart patterns will not assure that we never suffer losing
trades, but we can expect the majority of trades to be prof itable as
long as we apply the tools correctly.
Using our trading devices requires patience and discipline as
well as computer skills because our WINPHI software package is es-
sential for applying the tools. The User Manual in the Appendix in-
structs readers in operating the computer program.
FIBONACCI PRICE CORRECTION LEVELS
Whenever discussions among traders focus on correction levels, the
Fibonacci ratios 38.2 percent, 50.0 percent, and 61.8 percent come up.
As explained in Chapters 3 and 4, we favor the correction level
61.8 percent for the risk /reward ratio as being the best compared with
the alternative ratios. With this approach, however, we might miss
all those trades where the market does not correct as low as 61.8 per-
cent. Traders can solve this problem by combining the Fibonacci ra-
tios with other trading tools such as candlesticks or regular 3-point
chart patterns.
We f irst present trading signals generated simply with the Fi-
bonacci ratio 61.8 percent as our initial price correction level. Then we
show how the trading signals change on the same data series when we
merge candlesticks and 3-point chart patterns into the strategy.
Stand-Alone Fibonacci Correction Level 61.8 Percent
In our f irst example, we apply Fibonacci corrections to S&P 500 Index
data ranging from December 2001 to April 2002.
We use the following parameters:
• Swing size of 30 basis points; no entry rule, that is, immediate
countertrend entry as soon as the correction level is reached.
• Stop-loss point at swing high (sell signals) or low (buy signals).
• Daily data; slippage and commission excluded.
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