fractals

this annoys me more than pips and ticks used incorrectly annoys trader dante.

i have a bugbear with the way people incorrectly use the word fractal.

they know the market contains fractals as they’ve read it at babypips or wherever, but they apply the name to something completely different. what makes this worse is that unbeknown to them, it probably is a fractal yet they are demonstrating something different; a repeating pattern.

i’m not picking on anyone here, this is literally the first one that popped up when searching on twitter.

 

they are using previous price action to determine what might happen in the future. break up, condense to triangle, then break up again. this is perfectly valid technical analysis if triangles are your thing. but its a repeating pattern, and not specifically a fractal, in this representation anyway.

so what is a fractal?

A fractal is a shape made of parts similar to the whole in some way.

~Benoit Mandelbrot

what does that mean?

basically a fractal is a shape or object that itself is made of shapes and objects similar to its whole.

look at this fractal tree, its trunk is a line that splits into two branches. each branch is a fractal of the trunk, as it splits into two branches itself. each of these split into two branches also, and so on and so forth. yes the branches repeat at the same ‘size level’, but the key thing is that they repeat at different size levels, making it fractal.

 

going back to the twitter example, its not a fractal as the overall price action shape is not a reflection of the whole shape. the price action in its entirety is not a triangle. its just a repeating triangle pattern.

to show an actual fractal in markets, here’s an example in eurusd.

 

this is the daily timeframe. highlighted in blue is the fractal pattern i’m looking at. it ranges from Jan 2018 until may 2018 in case you wish to look yourself. i’ve drawn the pattern out to the side to better represent it. it’s a sharp increase in price, followed by a range, and then a sharp decrease in price.

so to make this a fractal, i’m not looking at the same pattern on the same timeframe elsewhere on the chart. im looking for the same pattern within the pattern itself. so lets “zoom in” to the hourly timeframe.

 

The blue highlight is exactly where it was on the daily, but we now see the hourly movements. I’ve highlighted in yellow the fractal pattern seen at this timeframe. so the daily timeframe pattern is made up of the same pattern on the hourly timeframe. it doesnt just stop there though, l;ets zoom in again onto the minute timeframe, and here is one of the hourly fractals in yellow still highlighted.

 

here we have the same fractal pattern highlighted in green. go look for yourself (assuming your minute chart goes back that far).

so now you know what fractals are now, how do fractals help you in your trading?

I specifically use them to help with multi-timeframe analysis, to help build context, or bias. if you have a pattern that gets you in on the 5 minute chart for example, are you in the same pattern on the hourly, 4 hourly or more. if so this helps build your bias, and allows you to play for bigger targets or lesser targets if the bias isn’t there.

i also use it to finesse entries, and exits. if you have a pattern that’s setting up on the hourly, zoom in to the 5 min timeframe and see if the same pattern is building there to help get you in more precisely.

to finish up i’ll leave you with Benoit Mandelbrot’s Mandelbrot Set.