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

Figure 6.7
Dax 30 chart from 08 –02 to 10–02. Fibonacci correction levels and
candlesticks.
c06.qxd 6/16/03 4:10 PM Page 178

---

FIBONACCI PRICE CORRECTION LEVELS
•
179
At the latest on the f ifth day after the price movement touching
the 38.2 percent retracement line, a harami pattern assures us of a
possible market entry long at controlled risk. We set the stop-loss at
the low of the day that breaks the 38.2 percent correction line.
A similar simulation can be conducted for the 50.0 percent re-
tracement level, which is also well recognized by traders. For traders
who plan to keep stocks longer in a portfolio, this is a decent correc-
tion level, especially because it is reached much more often than the
conservative 61.8 percent Fibonacci retracement level.
Figure 6.8 shows a chart of the S&P 500 Index between May and
September 2002.
Once again, we are caught in a situation where waiting for the
61.8 percent correction level might lead to a dead end with no trade
at all. Using plain correction levels without additional indicators has
little value, especially for traders with a short-term orientation. As
before, this is where candlestick pattern recognition becomes part of
the game.
Figure 6.8
S&P 500 chart from 05–02 to 09–02. Correction levels.
c06.qxd 6/16/03 4:10 PM Page 179

---

180
•
CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
Integrating the candlestick charting technique into the general
picture of Fibonacci price corrections changes the S&P 500 Index
chart, as shown in Figure 6.9.
The candlestick pattern analysis runs as follows for a long signal
in the S&P 500 Index once the price move breaks the 50.0 percent re-
tracement line:
• The harami candlestick pattern is a first indication that the mar-
ket correction might not continue.
• The harami pattern is followed by a hammer candlestick pattern.
The hammer is a very strong confirmation that a trend change to
the upside is about to occur.
• Finally, and in addition to the candlestick patterns, the resis-
tance line is signif icantly broken to the upside.