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

FIBONACCI PRICE CORRECTION LEVELS
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and can done by every trader. Knowing the price level a product 
is trading at is less important than knowing its most common 
swing size.
Every trading vehicle that we analyze has a different volatility.
In contrast to the S&P 500 Index, which shows a trading range be-
tween less than 800 points and somewhat above 1,200 points over the
past year, Microsoft trades at price levels between USD 40 and 70,
and Allianz trades at price levels between EUR 230 and 290. Traders
have to keep in mind that the smaller the swing size is, the more
trades we get. If the swing size selected is too large, we might not get
a trade at all. The easiest way to f ind a good swing size is to look at
historical data on the longest lasting sideward pattern to f ind the best
average swing size value.
Figure 6.4 contains the chart example of Microsoft over one year.
Figure 6.4
Microsoft chart from 11–01 to 11–02. Simulation of trading signals
based on plain price corrections daily in combination with 3-point chart pat-
terns (EL: entry long, ES: entry short, XL: exit long, XS: exit short, S-L: stop-loss,
TS: trailing stop).
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CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
Figure 6.5 shows the same trading approach applied to the Allianz
stock late in 2001 and early in 2002.
Having explained in detail the Fibonacci ratio 61.8 percent
in combination with candlesticks and 3-point chart patterns, it is per-
tinent to mention the alternative two Fibonacci-related key ratios:
38.2 percent and 50.0 percent.
Additional Fibonacci Correction Levels
Do 38.2 percent and 50.0 percent Fibonacci correction levels require
different rules from the ones described thus far in this chapter? This
question is important because nothing is more frustrating for a trader
than to wait for the Fibonacci retracement level 61.8 percent, and then
shortly before it is reached, to have the market turn with no trade done.