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

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CANDLESTICKS, CHART PATTERNS, AND FIBONACCI TOOLS
risk. However, many traders discover that this kind of trading demands
higher discipline to execute the trading signals because higher slippage
and commissions can take away much of the prof it potential.
In general, what makes PHI-ellipses relevant trading tools for
sideward markets is that they can be adjusted dynamically to differ-
ent sideward patterns. This is where most traders lack a trading tool.
The PHI-ellipse shows not only how far a sideward market might go,
but also where the stop-loss level and the prof it targets are. We have
designed stop-loss and profit taking rules by ourselves, and there is no
reason other traders cannot come up with profitable solutions that suit
their personal needs.
We provide a few chart examples to illustrate how to apply hori-
zontal PHI-ellipses in a profitable manner. We start with the S&P 500
Index between May and November 2002 (see Figure 6.33).
The PHI-ellipse in Figure 6.33 surrounds a chart pattern that
shows a signif icant peak at 965.00 and two signif icant valleys at
Figure 6.33
S&P 500 chart from 05–02 to 11–02. Sample trade.
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PHI-ELLIPSES
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875.00 and 868.00. Basic requirements for a countertrend PHI-ellipse
are a starting point and two side points. In contrast, since we lack a
starting point on horizontal PHI-ellipses, basic requirements for PHI-
ellipses in the direction of the main trend are peaks and valleys on the
upper border, lower border, or median line of the PHI-ellipse.
The most important factor to watch while working with horizon-
tal PHI-ellipses is that the PHI-ellipse is locked in, meaning that it
cannot be moved higher or lower any more. It is the constellation of
peaks and valleys that gives stability to a horizontal PHI-ellipse. In
our S&P 500 Index example, we get overall stability through the two
peaks in the middle that touch the median line of the PHI-ellipse.
A sell signal is f illed in the S&P 500 Index once the support line
of the PHI-ellipse is broken. The prof it target is twice the distance be-
tween the peak at 965.00 and the valley at 868.00. The new resistance
line is identical with the low of the price movement at 771.00 points
(where we take our prof it). The stop-loss is placed at the peak before
the sell signal.
A couple of horizontal PHI-ellipses can also be seen in Figure
6.32. Long entry EL4 was discussed earlier; the two short entries
ES1 and ES3 and the long entry EL2 are the ones that we focus on in
this section.
The f irst short entry is based on a PHI-ellipse locked in with
three peaks on the upper side, one peak and one valley on the median
line, and one valley at the lower side of the PHI-ellipse. Incorporated
in the PHI-ellipse movement is also a symmetrical triangle. When the
valley at the border of the PHI-ellipse is broken, we get f illed on our
sell signal. The prof it target is reached at twice the width of the PHI-
ellipse. The stop-loss is placed at the peak prior to the sell signal.
The f irst long entry is based on a very small PHI-ellipse. Al-
though most traders might think such a small PHI-ellipse would not
be signif icant enough for trading, it demonstrates that PHI-ellipses
can be dynamically adjusted to bigger and smaller price moves.
The PHI-ellipse in question gets its stability from two peaks on
the upper border and two valleys on the lower border. The buy signal
is executed when the upper border of the PHI-ellipse is broken. The
prof it target is twice the total width of the PHI-ellipse. The stop-loss
is at the valley before the market entry.
The PHI-ellipse on which the second short entry is based gets its
stability from two peaks touching its upper border, two peaks touching
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