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

Figure 5.14
Long entry on a runaway market.
Figure 5.15
Stop protection on runaway long entry.
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BASIC FEATURES AND PARAMETERS OF PHI-ELLIPSES
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129
The most conservative strategy is to work with a trailing stop
set to the high of the previous four days on sells (vice versa on buy
signals). In most cases, this option protects at least part of the prof-
its, but it also means giving away open prof its already accumulated
(see Figure 5.16).
If we do not want to give up any of our accumulated prof its, we
can take the risk that the market might move in the direction of our
signal after we get stopped out in a prof it. In this case, we should pre-
def ine a f ixed prof it target level to cover a position.
We select profit target levels that can be derived from the PHI se-
ries (introduced in Chapter 4). The levels we work with are 38.2 per-
cent, 50.0 percent, and 61.8 percent of the total preceding market
move, which is the distance from bottom to top of the PHI-ellipse that
generated our entry (see Figure 5.17).
Figure 5.16
Trailing stop exit on previous 4-day high breakout.
Figure 5.17
Profit target levels at 38.2 percent and 61.8 percent.
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130
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PHI-ELLIPSES
The prof it target level that an investor favors depends not only
on the risk preference of the investor, but also on the amplitude of the
preceding PHI-ellipse.
If the initial move inside the PHI-ellipse is smaller than a sam-
ple 200 ticks in the Japanese Yen cash currency (e.g., from 110.00 to
112.00), a larger profit target level of 61.8 percent is preferable; other-
wise, the prof it potential is too small. On the other hand, if the total
amplitude of the underlying move is 10 full points (e.g., from 110.00
to 120.00) in the Japanese Yen cash currency, a prof it target level of
38.2 percent might be good enough for an investor to minimize risk.
In addition to trailing stop exits and prof it target exits, we can
wait for a 3-wave swing in the direction of our signal and an extension
out of this 3-wave swing.
As explained in Chapter 4, we precalculate the size of an exten-
sion by multiplying the amplitude of wave 1 by the Fibonacci ratio
1.618. We liquidate a position as soon as the prof it target level in the
direction of our signal has been reached at 1.618 times the amplitude
of wave 1 (see Figure 5.18).
Price targets are a solid way of exiting positions, but we can also
def ine targets in time to protect accumulated gains.
To establish the average standard length of PHI-ellipses on any
product based on numbers of the Fibonacci summation series, we can
use historical data, along with a constant scale supplied by the WINPHI
software and conduct test runs. If we then find out, for a certain prod-
uct, that the average length of PHI-ellipses is 21 days, we can exit po-
sitions that have not been stopped out after 21 days (given that they