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

Figure 6.5
Allianz chart from 10–01 to 04–02. 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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FIBONACCI PRICE CORRECTION LEVELS
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The dilemma of making the right decision at the right time based
on Fibonacci price corrections becomes obvious when we look at the
Dax 30 Index in Figure 6.6.
A strong rally is followed by a price correction to the f irst 
Fibonacci retracement level of 38.2 percent. At this point—when al-
most all information services, market letters, and media represen-
tatives call for new lows—the trader must decide whether to wait for
the 61.8 percent retracement level or to risk executing a long trade
in the Dax 30.
What we need and are trying to f ind here is additional support
that makes the decision a little easier. A tool that could help us con-
sider the f inal strength of the price correction would be ideal.
One tool that has proven reliable already when used in combina-
tion with the 61.8 percent Fibonacci correction level is candlestick
charting. If we change the charting technique and add candlesticks to
Figure 6.6
Dax 30 chart from 08 –02 to 10–02. Fibonacci correction levels.
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178
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CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
the chart of the Dax 30 Index, we see a clear picture that makes our
decision convincing and valid (see Figure 6.7).
From the chart, we can draw the following rules for a solid short-
term long trade in the Dax 30 index:
• The Fibonacci Level 38.2 percent is reached.
• After the correction level is reached, we identify a doji candle-
stick pattern, which is a strong indication that the market price
will at least not drop further from this price level. The following
day, we identify an engulf ing candlestick pattern that conf irms
the market price is ready for a correction.
• To receive still more conf irmation of the potential trend reversal
to the upside, we can wait two more days; the market price forms
a double bottom.