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

FIBONACCI PRICE EXTENSIONS
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problem, we have combined different correction levels with candlestick
patterns and 3-point chart patterns in our examples. Combining
Fibonacci price extensions and corrections can be of great help for a
trader who is looking for solid entry levels.
Long-term and short-term calculations based on price correc-
tions, f inally, can be combined with price extensions, 3-point chart
patterns, and PHI-ellipses. Combinations of the three seldom show
up. As discussed, it takes a lot of discipline to wait for such combi-
nations, and it is an even bigger problem to execute the trading sig-
nals when they show up. Inexperienced investors often are afraid to
take countertrend signals. To make investment decisions easier and
more reliable, we look for multiple conf irmations of trend reversals.
FIBONACCI PRICE EXTENSIONS
In general, extensions mean investments against the main trend, which
is def ined by the f irst impulse swing in a 3-wave move or a 5-wave pat-
tern. Extensions are important as Fibonacci trading tools because they
show up not only in fast moves over a couple of days or weeks in soft
commodities, but also in f inancial instruments, derivatives, or curren-
cies as indicators of major trend changes.
Extensions occur at extreme points when media coverage sets in-
vestors on f ire. Traders must be patient and disciplined because ex-
tensions are patterns that can rarely be detected in the markets. As
stated, markets are in a trending state less than one third of the time.
Therefore, we receive many more signals on the basis of corrections
than extensions.
Generally speaking, extensions are def ined on the basis of a
3-wave pattern. A target price is calculated from the initial swing
size of the first impulse wave, multiplied by the Fibonacci ratio 1.618
(or the alternative ratios 0.382, 0.618, 1.000), and the resulting prod-
uct, once again, added to the swing size.
In this section, however, we are not so much interested in exten-
sions as trading tools to generate countertrend trading signals once
the price target is reached. What we want to deal with are the price
targets at the end of Fibonacci extensions because they are highly sig-
nificant indicators of points in the market action where trend changes
are likely.
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