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

Figure 5.2
General structure of a 3-wave pattern.
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PHI-ELLIPSES
PHI-ellipse, action is possible, but only if a price pattern runs com-
pletely inside a PHI-ellipse until reaching the f inal point.
As a general rule, if the angle of a PHI-ellipse is sloping upward,
we can sell at the end of the PHI-ellipse. If the slope of the PHI-ellipse
is downward, we can buy at the end of the PHI-ellipse. The exceptions
to this rule are described later.
It is important to remember that PHI-ellipses are not means of
forecasting market moves. We will never know in advance whether a
price move will stay within the PHI-ellipse and reach its end so that we
can take action. We must always wait to see if a price move stays inside
the borders of the PHI-ellipse, and we cannot take action unless the
move meets the final point of the PHI-ellipse. The rationale behind this
waiting principle becomes clear in the examples later in this chapter.
Working with PHI-ellipses means watching price action as it pro-
gresses. Price action starts with the impulse wave 1 from A to B in
Figure 5.2, followed by the correction from B to C. In the discussion of
corrections and extensions in Chapter 4, Elliott’s wave principles
helped us determine that the corrective move is not expected to go
lower than the low at the beginning of wave 1. Only in exceptional
cases did we consider bull traps and bear traps. With PHI-ellipses,
however, we consider all sorts of 3-wave moves as long as we can put a
PHI-ellipse around them (see Figure 5.3).
The 3-swing pattern in Figure 5.3 is an ideal picture of a price
move, but in reality, waves within a PHI-ellipse may take many forms
Figure 5.3
PHI-ellipse circumventing a 3-wave price pattern.
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