Selected Reversal Chart Patterns
The most common reversal chart patterns share three characteristics 1. They form at the end of an uptrend or downtrend. 2. The bigger the chart formation, the bigger is the following reversal. 3. In general, chart formations on tops are shorter and have a bigger volatility than bottom formations. The most common chart patterns are double top and double bottom formations. Since double tops and double bottoms occur frequently in small price moves, their forecasting value is somewhat limited. The...
Basic Features And Parameters Of Phiellipses
The PHI-ellipse is a unique Fibonacci trading tool that can only be drawn by a computer. As mentioned in Chapter 3, PHI-ellipses identify underlying structures of price moves and circumvent price patterns. When a price pattern changes, the shape of the PHI-ellipse circumventing the respective market price pattern changes, too. Nearly all market price moves follow the pattern of a PHI-ellipse. PHI-ellipses are related to the Fibonacci ratio PHI in a similar way as the Fibonacci summation series,...
The Fibonacci Summation Series in Nature and Geometry
It is remarkable how many constant values can be calculated using Fibonacci's sequence, and how often the individual numbers of the sequence recur in myriad variations. This is not just a numbers game, however it is the most important mathematical representation of natural phenomena ever discovered. Generally speaking, the Fibonacci summation series is nature's law, and it is a part of the aesthetics found in any perfect shape or curve. Fibonacci discovered how nature's law related to the...
Bullish and Bearish Engulfing Patterns
Whereas hammer and hanging man are single candlestick formations consist of one candlestick , the bullish and bearish engulfing patterns need a pair of candlesticks to complete the pattern see Figure 4.24 . The bullish engulfing pattern often occurs at the end of a downtrend and indicates a trend reversal. We buy at the high of the day with the big, white candlestick. The stop-loss is placed below the lowest low of the small or big candlestick, whichever is lower. The bearish engulfing pattern...
Trading Psychology and Investor Behavior
The market price of a stock at any exchange never represents the company's fair value. The stock instead is trading either above or below that valuation. Over the past couple of years, the potential discrepancy between market capitalization and fair value became painfully obvious to investors. Supported by analysts' unrealistic price forecasts, many high-tech stocks reached untenable high prices and then, in some instances, became worthless because there was no real value behind these...
StopLoss Rule 1
In working with price corrections, the stop-loss after the entry should be the peak on short signals or valley on long signals before the entry point. Figure 4.9 shows the stop-loss rule of a peak valley exit and the immanent stop-loss risks. Figure 4.9 Exits on valleys long and peaks short and immanent stop-loss risks. Figure 4.9 Exits on valleys long and peaks short and immanent stop-loss risks. The size of the stop-loss changes in relation to the chosen correction level and the swing size....
The Magic Figure Three
In presenting Fibonacci Trading tools, candlesticks, and chart price patterns, we concentrate on the ones that have a high analytical value and can be combined with each other. Our goal is to avoid information overflow, while providing adequate detail, because all of the strategies can be important in different market situations. A key question is whether all of these patterns have a common denominator. The answer is a definitive yes all of them include the figure three Three waves in price...
Generating Trading Signals Based on Candlestick Patterns
Hammer and Hanging Man Inverted Hammer A candlestick chart pattern is called a hammer if it has a long shadow and a small body black or white that is very close to the high of the day. At the end of a downtrend, the hammer is considered a bullish reversal signal see Figure 4.23 . The hammer often shows up at the end of a downtrend. After we identify a hammer, we buy next day at the high of the previous day. The stop-loss is below the low of the previous day. The corresponding candlestick chart...
Summary Yha
A major advantage of candlesticks is that they show the momentum of every day's price moves. They are definitive, easier to understand than bar charts, and especially helpful for short-term traders. The usefulness of candlesticks as stand-alone trading tools has to be judged carefully. Our own simulation on the DJ EuroStoxx 50 Index came up with a solid profit potential and a decent profit loss ratio over a 3-month test period in mid-2002. However, negative test results were retrieved from...
Introduction of the Fibonacci Trading Tools
In general, for corrections with Fibonacci-related trading tools, an impulse wave that defines a major market trend upward or downward will have a corrective wave before the next impulse wave reaches new territory. This occurs in both bull market and bear market conditions. Analysis would be easy if we could detect a single general pattern of corrections. The problem is that there can be many more price patterns than impulse waves in the commodities, futures, stock index futures, stocks, or...
Three Rising Valleys and Three Falling Peaks
Three rising valleys and three falling peaks are among the most stable and reliable 3-point chart patterns. The general pattern consists of either three valleys with two peaks in between or three peaks with two valleys in between. In contrast to the other 3-point chart patterns described thus far in this section, three rising valleys and three falling peaks are trend-following patterns and do not indicate trend reversals. We get a short signal at the low of the lowest valley and a buy signal at...
Selected Continuation Patterns
Symmetrical, Ascending, and Descending Triangles A symmetrical triangle has two merging trend lines. For this formation, at least two peaks and two valleys are necessary. To reduce false breakouts, investors should wait until there are either three peaks and two valleys or three valleys and two peaks. With this approach, however, it is possible to completely miss a trend. To receive a valid signal, a closing price has to be above the resistance line or below the support line. The more the price...
Price Extensions in 3Wave Patterns
Extensions take place primarily in the third wave of a 3-wave price pattern. In an uptrend, the correction does not go lower than the bottom of wave 1, whereas in extensions out of a bull trap or bear trap formation of irregular tops or bottoms, the correction can go higher than the high of the first impulse wave or lower than the low of the first impulse wave, respectively. Two basic chart formations for price extensions are illustrated in Figure 4.16. Exploring extensions means investing...