Wednesday, July 6, 2011

Fischer, Trading with Charts for Absolute Returns

Robert Fischer, author of Fibonacci Applications and Strategies for Traders, The New Fibonacci Trader, and Candlesticks, Fibonacci, and Chart Pattern Trading Tools has a new book out: Trading with Charts for Absolute Returns (Wiley, 2011). In it he explains chart pattern recognition, especially Fibonacci and Elliott wave principles; trend channels and trend lines; and, his ultimate weapon, the PHI-ellipse. The PHI-ellipse must be computer generated and is available as part of Fischer’s Fibotrader software package ( The software can be used free as long as the user is willing to import .ascii data manually.

Although the book clearly promotes the software package, it offers quite solid tips on how to work with support and resistance lines—and, among other things, use false breakouts to one’s advantage. The author identifies patterns such as support lines based on three valleys and a false breakout and its counterpart, resistance lines based on three peaks and a false breakout.

The PHI-ellipse is not a new trading tool (the author introduced it already in 2001), but it has taken Fischer time to develop trading rules based on it. So what is it? As you might imagine, it is an ellipse where “the ratio of the major axis divided by the minor axis of the ellipse is a member of the PHI series 0.618 – 1.000 – 1.618 – 2.618…. A circle, in this respect, is a special type of PHI-ellipse with a = b (ratio a:b = 1).” But, without tinkering with this ratio, there’s a problem. “PHI-ellipses with increasing ratios ex = a:b of major axis to minor axis turn very quickly into ‘Havana cigars’—and … become so narrow that they can hardly be applied to charts as an analytical tool. … To make PHI-ellipses work as tools for chart analysis, the mathematical formula that describes the shape of the ellipse is transformed. The ratio of the major axis a to the minor axis b of the ellipse is still under consideration, but in a different way—in mathematical terms, ex = (a:b)x.” (pp. 142-43)

What makes the PHI-ellipse so special? It is a trend-following trading tool designed to keep the investor in the trending market as long as possible. It integrates price and time into a single tool and can dynamically adjust to price moves. On the downside, it cannot be part of a fully automated trading system.

Fischer takes the reader through the best peak/valley structures for drawing the PHI-ellipse and offers rules for trade entries. And he, of course, directs the reader to the companion web site. The software is free to download for a 15-day trial; afterwards, if you don’t pony up the subscription fee, it turns into an .ascii-only data program.

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