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

Long-Term Trend Changes in the Japanese Yen Cash Currency
In contrast to the previous projection to define future resistance areas
of the S&P 500 Index, the following chart example shows trend
changes in the Japanese Yen cash currency.
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FIBONACCI PRICE EXTENSIONS
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Our historical daily data sample covers February 2001 to No-
vember 2002. Five major trend reversals based on price extensions
can be pinpointed for the 20 months, according to Figure 6.18.
The signif icant trend reversals in the Japanese Yen cash cur-
rency are marked A to F. The calculations of price targets to conf irm
the trend changes run as follows:
• The price band for the trend change at point A is calculated by
multiplying the distance from point 2 to point 3 by the Fibonacci
ratio 0.618, and by multiplying the distance from point 4 to point
5 by the ratio 1.618.
• The price band for the trend change at point B is calculated by
multiplying the distance from point 1 to point 2 by the ratio
Figure 6.18
Japanese Yen chart from 02–01 to 11–02. Major trend changes.
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194
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CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
0.618, and by multiplying the distance from point A to point 6 by
the ratio 1.618.
• The price band for the trend change at point C is calculated by
multiplying the distance from point 7 to point 8 by the ratio
1.618, and by making use of the support level formed by the sig-
nif icant peaks at points 2 and 4.
• The price band for the trend change at point E is calculated by
multiplying the distance from point B to point C by the ratio
1.000, and by multiplying the distance from point D to point 9 by
the ratio 0.618.
• The price band for the trend change at point F is calculated by
multiplying the distance from point E to point 10 by the ratio
0.618, and by a 50.0 percent retracement measured on the swing
from the peak at point 7 to the valley at point E.
• The tools applied do not identify the trend change in D. There is
no price band to capture the trend reversal at point D.
Summary
Working with Fibonacci price extensions can be important to calculate
long-term or short-term turning points in any traded product.
We have presented examples for determining price bands as tar-
gets for market movements. To def ine the upper and the lower border
of a price band and thereby separate the important price targets from
the less important ones, we use:
• Fibonacci price extensions calculated from different swing sizes.
• Fibonacci price extensions in combination with Fibonacci price
corrections.
Price bands, or clusters, are those signif icant areas on the price
scale where price targets calculated from different swing sizes either
overlap or are very close together. Price clusters are especially mean-
ingful when conducting projections of future price movements as ex-
emplif ied on the S&P 500 Index. The Japanese Yen cash currency
example shows how major turning points in the markets can be iden-
tif ied successfully on highly volatile products.
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