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

APPLICATIONS OF TRADING STRATEGIES
However, there are exceptions to this rule. These are described in
the later discussion of specif ic chart patterns.
Profit Target Rules
There are several ways to work with prof it targets on long and short
positions.
Some basic calculations can provide easy-to-follow prof it target
rules that have proven to be successful in various market situations:
• Price projections based on Fibonacci ratios.
• Parallel trend lines.
• Total length of the f irst impulse wave (with reference to the El-
liott count).
• Doubling the total distance of the price pattern from highest
high to lowest low.
Figures 4.30a to 4.30d show the preceding options for predef in-
ing prof it targets on a long entry.
Figure 4.30a
Profit target rule (ratios).
Figure 4.30b
Profit target rule (parallel lines).
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3-POINT CHART PATTERNS FOR TREND REVERSALS
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Trailing Stop Rules
To protect open prof its, we can apply trailing stops in different ways.
As long as the market moves in a narrow trading range, we can pro-
tect small prof its by working with a 3- to 4-day previous high (short
positions) or low (Figure 4.31).
Figure 4.30c
Profit target rule (impulse wave).
Figure 4.30d
Profit target rule (double distance from highest high to lowest low).
Figure 4.31
4-day breakout trailing stop rule out of a long position.
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APPLICATIONS OF TRADING STRATEGIES
Even though this approach is effective for the short term, large
prof its cannot accumulate in a single product, for we get stopped out
too quickly. The most commonly used trailing stop rule is to work with
previous peaks or valleys. This approach works less well when a prod-
uct is in a trading range, but it opens up the opportunity for bigger
prof its in trending market situations.
Figures 4.32a and 4.32b show the valley/peak trailing stop rule
out of a long and a short position.