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

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APPLICATIONS OF TRADING STRATEGIES
FIBONACCI PRICE CORRECTIONS
The strategy of trading corrections can be very successful if it is re-
lated to the f igures of the Fibonacci summation series and the Fi-
bonacci ratios.
The analysis would be simple if there were a general chart pat-
tern for price corrections. The problem is that products always have
more corrections than impulse waves. This means that products al-
ways move in a sideways pattern for a longer time than they move in
impulse waves. In general, markets move sideways about 70 percent of
the time and in impulse waves in the remaining 30 percent.
It is never possible to know in advance whether a new breakout
will be the beginning of an uptrend or a downtrend, or a false break-
out with a continued sideways pattern. Therefore, traders must adjust
their strategies so that they can survive the longest sideways patterns.
No market pattern can guarantee prof its because no one knows in ad-
vance the pattern that the market will take at any given time.
When working with corrections as an investment strategy, it is
necessary to integrate stop-loss rules, prof it target rules, and entry
rules. This strategy will only make prof its over time if the stop-loss
is smaller than the prof it target and there are more prof itable trans-
actions than losing trades.
A strategy based on price corrections can be computer-
programmed and tested on historical data. Some simulations that we
have made can be found at the end of this chapter.
Basic Features of Trading Price Corrections
Working with corrections is a trend-following strategy based on the
assumption that after a correction of an impulse wave up or down, the
next impulse wave will follow the direction of the f irst wave.
Working with corrections is a short-term strategy. The goal is to
have a high number of prof itable trades and only a few losing trades
(at small individual losses per losing trade).
Traders always must be aware of the possibility of false break-
outs. False breakouts on the downside are often called “bear traps,”
and on the upside they are called “bull traps.” Intraday data fre-
quently reveal these patterns.In Figure 4.6, we present ideal-typical
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