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

Figure 6.27
Japanese Yen chart from 03–02 to 11–02. Sample trade.
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SUPPORT AND RESISTANCE LINES
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The experienced trader not only looks at the prof it targets, but
also carefully observes the overall picture. At the point where the first
prof it target is reached, we f ind a chart formation of an ascending tri-
angle. We may wait for the second prof it target, but more importantly,
we may reverse our position and buy Japanese Yen against U.S. Dol-
lars prior to triggering the second target price as soon as the support
line of the ascending triangle is broken.
Dax 30 Index Sample Trade
Our f inal chart example, the Dax 30 Index, illustrates once again the
symmetrical movement of market prices in stocks, stock index futures,
cash currencies, and other trading vehicles.
Figure 6.28 shows three market entries in the Dax 30 Index as
of September and October 2002. The f irst market entry is short, as in
the previous Intel example. After reaching our target price short, we
f ind two options for establishing a long position.
Figure 6.28
Dax 30 chart from 03–02 to 11–02. Sample trade.
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CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
The market entry short occurs when the level of 3,252.00 points
in the Dax 30 Index (i.e., the support line) is broken. Doubling the
width of the rectangle points at a price target at 2,572.00. The lowest
low of the price move can be found at 2,536.00.
The f irst buy signal can be generated when the resistance line of
the symmetrical triangle and the lowest peak are broken at a price
level of 3,000.00 points. Traders with the discipline to execute a buy
signal at this price level can liquidate the position at the f irst resis-
tance line at 3,252.00.
The alternative, second buy signal is at 3,330.00 after the
breakout of the market price at the resistance line. The new prof it
targets are at the price levels between 3,908.00 and 3,938.00. The
first price target at 3,908.00 is the resistance line of the rectangle al-
ready used to calculate the sell signal. The second price target at
3,938.00 is twice the distance from the valley at 3,000.00 to the peak
at 3,461.00.
We can use this chart pattern because it has formed three valleys
at the bottom. We do not use the distance between the low at 2,536.00
and the high at 3,330.00 for the calculation because the price target
would be at 4,099.00. This is a good example of price clusters formed
by a resistance line and a Fibonacci price target being better qualified
than those based exclusively on the Fibonacci ratios.
What this example also shows is that with the rotation of the
market price, there is also a rotation between support and resistance
lines. What is the support line when we get a sell signal becomes the
resistance line once the market price changes the direction and moves
up again.
Summary
Is f inding a good entry point easier than knowing where to sell? Most
traders have a problem being consistent in their investment strategy.
Long-term prof it targets mean big swings and big stop-losses. Short-
term prof it targets mean smaller prof its and smaller stop-losses. A
strategy with big prof its at a small stop-loss risk does not exist, even
though everybody would like to have it.
In this section, we introduced a concept that suggests when to
liquidate an open position. What makes trading with resistance and
support lines so valuable is that they adjust dynamically to different
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