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

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BASIC PRINCIPLES OF TRADING STRATEGIES
three points are necessary—the starting point and two side points. It
is possible to draw the PHI-ellipse if the second impulse wave is at
least as long as the f irst impulse wave. This principle is shown in Fig-
ure 3.9.
After identifying the points A, B, and C in the typical 3-wave
swing, we can position the PHI-ellipse around these points. Wave 1,
from A to B, is an impulse wave. Wave 2, from B to C, is the corrective
wave to the impulse wave. For wave 3, we expect a second impulse wave
in the direction of the f irst impulse wave. This general pattern follows
Elliott’s Wave Principle and can be seen in every traded product, be it
commodities, futures, stocks, or cash currencies.
The fundamental structure of the PHI-ellipse provides another
way to analyze price moves. What makes it unique is that it is dy-
namic over time and follows price patterns as they develop. That is
why it is necessary to be patient and wait—from the very beginning
to the very end—until a price move stays within the PHI-ellipse.
Traders can take action as soon as the market price moves out of the
PHI-ellipse, but only if a price pattern runs completely inside until
reaching the f inal point.
There are several ways to invest against the market trend at the
end of the PHI-ellipse:
• Enter a position when the market price breaks the outside line of
the PHI-ellipse.
Figure 3.9
PHI-ellipse circumventing a 3-wave price pattern.
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FIBONACCI ANALYSIS
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• Enter a position based on a chart price pattern that forms at the
end of the PHI-ellipse.
• Enter a position when the market price moves out of the outside
line, which is parallel to the median line of the PHI-ellipse.
Selling at the end of a PHI-ellipse is recommended when the PHI-
ellipse has an upward slope. Buying at the end of a PHI-ellipse is rec-
ommended when the PHI-ellipse has a downward slope.
An entry rule conf irms trend reversals to the upside or downside
at the end of a PHI-ellipse. The rule is set to the lowest low of the pre-
vious one, two, three, or four days for sell signals, and the highest high
of the previous one, two, three, or four days for buy signals. The choice
of entry rule depends on investors’ risk preference and how early they
want to be invested.
In the example shown in Figure 3.10, we choose the conservative
option of a double conf irmation by PHI-ellipse and trend channel.
With this option, we may give up some of the prof it potential that we
could have realized with a more sensitive entry rule. On the other
hand, we avoid losing trades in strong trending market conditions by
staying in the trend as long as it lasts.