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

Regular Trend Lines and Trend Channels
Every peak or valley in the markets is a prominent indicator of what
the majority of investors were thinking at any particular moment in
time. The signif icance of peaks or valleys becomes evident only
through the passing of time. Intraday peaks or valleys are less mean-
ingful than peaks or valleys monitored on a daily basis. In this sec-
tion, we concentrate on daily data compression.
To draw a trend channel, we need at least three points—two
peaks and a valley or two valleys and a peak. Figure 3.32 shows a reg-
ular 3-wave price pattern.
To draw a trend line between point 0 and point 2, peak 1 must be
penetrated to conf irm the uptrend. Once it is possible to draw the
trend line between point 0 and point 2, investors can project peak 3 by
drawing, through point 1, the parallel to the support line connecting
point 0 and point 2. Different trend lines are used to stay as close as
possible to the different degrees of a trend. When the upper channel
line is broken, a new trend channel can be drawn if the market’s price
keeps moving higher (Figure 3.33).
Figure 3.32
Regular trend channel.
Figure 3.33
Continuing trend channels.
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TREND LINES AND TREND CHANNELS
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A failure to reach the resistance line of the channel in an up-
trend is often an early warning signal that the support line will be
broken on a trend reversal at point 10 (vice versa for a downtrend).
PHI-Channels
PHI-channels vary in distinct ways from regular trend channels. Ini-
tially, we can detect the same pattern structure as regular trend
channels. However, instead of isolating the outside points, connecting
highs with highs and lows with lows to come up with trend lines, we
base PHI-channels on peak-to-valley and valley-to-peak connections.
The baseline of a PHI-channel can be generated out of a 3-wave
market move, as shown in Figure 3.34.
The baseline of a PHI-channel is the connection of the price move
from the bottom, at point 0, to the top, at point 3. By connecting the
high point 3 with the low point 0, we eliminate the biggest problem in
working with regular outside trend channels: staying close enough to
fast changes in price patterns.
After establishing the baseline, we draw a parallel line to the
baseline, using low point 2 as our outside point to the right of the
price pattern. The distance from the baseline to the parallel line is
the width of the PHI-channel, which can be used to calculate further
parallels to the right based on the Fibonacci ratios.
The important charting technique of getting to a set of parallel
trend lines in Fibonacci distances from the PHI-channel is illustrated
in Figure 3.35.