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

WORKING WITH PHI-ELLIPSES ON DAILY DATA
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move breaks the outside of the PHI-ellipse that we are watching for
our market entry.
The stop-loss level on countertrend entries is the most recent
peak (or valley) generated after the sell (or buy) order was f illed (see
Figure 5.32).
Once we are stopped out, we have to wait for a new outside line
of the PHI-ellipse to be broken (in accordance with our entry rule).
In two exceptional cases, we enter the market in line with the
major trend direction. The f irst case is the sideward market mani-
fested in a horizontal PHI-ellipse, as illustrated in Figure 5.33.
In a sideward market, there is no major trend direction. We enter
the market short (or long) in line with the short-term trend as soon
Figure 5.32
Stop-loss on a recent peak breakout on a short position.
Figure 5.33
Establishing a short position on a horizontal PHI-ellipse.
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148
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PHI-ELLIPSES
as the outside line of the horizontal PHI-ellipse and a valley (or peak)
are broken.
When we buy or sell at the end of a PHI-ellipse, we rarely get
stopped out. If we f ind the scenario of a runaway market, we reverse
our position at the stop-loss level (see Figure 5.14 for a recap).
To exit our positions, we apply trailing stops and def ine them as
the most recent peaks (on short positions) and valley (on long posi-
tions) in a prof it. This is a slight modif ication of the 4-day high / low
breakout trailing stop rule from Figure 5.16.
The peak and valleys used as trailing stops should not be defined
in a too sensitive manner. They should consist of at least two lower
highs (for peaks) or two higher lows (for valleys) on either side of the
highest high or lowest low.
In our S&P 500 Index trading example on daily data, we show
a total of 15 signals between February 2001 and November 2002 (see
Figure 5.34).