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

Figure 4.2
Entry rule.
c04.qxd 6/16/03 4:17 PM Page 48

---

DOUBLE TOPS AND DOUBLE BOTTOMS
•
49
experienced trader might work with two stop rules, depending on the
market situation.
Figure 4.3 shows the stop-loss rule after a long and a short entry.
Prof it target exit rules to protect positions with accumulated
prof its complement stop-loss rules used to protect positions against
excessive losses.
Profit Target Rule
At this point in the discussion, we use the total swing size as the
prof it target (e.g., if the swing size is 300 points, our prof it target is
300 points).
It is amazing how often this simple rule works. But sometimes it
does not. The experienced trader might want to tailor other rules for
a special product or market situation. The preceding prof it target rule
is shown in Figure 4.4.
Figure 4.3
Stop-loss rule.
Figure 4.4
Profit target rule.
c04.qxd 6/16/03 4:17 PM Page 49

---

50
•
APPLICATIONS OF TRADING STRATEGIES
The rules described here work if traders have the patience to
wait for prof it targets and can live with bigger stop-loss rules. There
is no perfect rule: every market situation is unique and products dif-
fer in volatility.
We have backtested these rules in a diversif ied portfolio; they
work. Later, we discuss these rules in greater detail. To keep it sim-
ple, we did not describe trailing stops, but they are included in some
of the examples.
Example
In Figure 4.5, we show how to apply the strategy of double tops and
double bottoms using the DJ EuroStoxx 50 Futures Index between
August 2001 and August 2002. Because we are working with a big
swing size, there are only three signals in the test period. It is easy to
increase the number of trades by reducing the swing size to 200 points
or 100 points.