Fractal analysis is a kind of artistic perception of an object within the boundaries of identical geometric shapes.
For example, the hostess bakes a pie in the oven on a rectangular baking sheet. The finished product cuts into identical rectangles, reminiscent of the shape of the whole product. The portioned pieces have the same color, taste and composition as the whole pie. A piece of cake and a whole cake are identical in everything. A cut pie can be called a fractal. Because the whole consists of pieces similar to itself.
Entity entity
The principle of similarity applies to exchange trading. Prices of market instruments are viewed on long and short time frames and find striking similarities in the behavior of the chart for minutes and the other day, for example.
The theory of fractal analysis sounded in the last quarter of the twentieth century. A new word was introduced into the everyday life of market science by the mathematician Benoit Mandelbrot. The researcher replaced the word "recursion" with a sore mouth with Latin "fractal". The American and French scientist gave the financial world a way to study by sequentially dividing the observation intervals and finding symmetry on the graphs of long and short price movements.
Understand geometry and win
A fractal as an indicator shows the minimum and maximum price on an odd number of periods of the selected time interval. The rational number of periods that have taken root in practice is five.
For a combination of 5 candles, a fractal is displayed if a symmetrical figure is fixed:
- for the green “up” fractal, the extreme two candles to the left and to the right of the central one display prices below the maximum;
- for the red fractal “down”, the left and right pair of candles should show above the minimum.
The number of candles in combination can be increased. Obviously, for 9 candles, groups of candles on the left and right consist of four periods.
When superimposed on a chart, fractal prices are indicated by a short arrow. The "up" fractal shows the price increase to a maximum for a selected period of time, and the "down" fractal displays a minimum at the same time interval.
The practice of trading systematized fractals into:
- standard, when the middle candle indicates the achievement of one extreme;
- non-standard, when the average candle reflects both extremes.
The appearance of a non-standard candle signals a conflict of interests between sellers and buyers. The market at this moment should choose one of the directions of movement.
The use of fractal analysis
The division of the whole into many similar figures is used in many branches of knowledge, for example, such as:
- maths;
- architecture;
- economics and finance;
- design.
Our article is addressed to the reader with exchange interests.
All price series have the property of statistical similarity. Minute, hourly and daily charts with fractals look the same so that if you exclude the marking of the coordinate axes, then it is not known which period is considered.
Fractal Analysis Methods
To describe the price evolutions of the exchange asset and the subsequent forecast of the price course for any time periods, fractal mathematics based on the R / S analysis algorithm is used.
The dimensionless ratio of the magnitude R of the observed parameter to the standard observation delta S is the basis of the normalized analysis method.
You can evaluate the strength of a trend on an asset chart and the level of random price fluctuations by analyzing a normalized range for exceeding a value of 0.5.
The meaning of calculations and constructions is to determine the color of the market information noise. The algorithm of the method involves the calculation of the Hurst index H - the fractal characteristic of the analyzed time period - as well as the noise quality:
- 0.5 ± 0.1 - “white noise”; chaos of the time period; low reliability forecast;
- ≥ 0.6 - “black noise”; orderliness of chaos; trend strength; high reliability forecast;
- 0.3 ± 0.1 - “pink noise”; anti-persistence zone - changes in the direction of growth of the increment in the opposite direction: growth in the early periods signals a decrease in the future, and vice versa, a declining trend in the past increases the likelihood of growth in the future.
For "manual" trading, these are too burdensome constructions. Complex mathematics is needed to develop trading robots.
In the realm of currency pairs
In the foreign exchange market, the fractal analysis of the pair is appropriate and in demand due to large trading volumes.
Of course, the choice of currency traders varies. But to study it is useful to study the charts of popular pairs:
- Euro / dollar;
- pound / dollar;
- dollar / yen;
- Euro / yen;
- Australian dollar / dollar.
To fill your hands, open a demo account with any broker. Connect the trading program and display on the screen separate sheets of charts of currency pairs for the current month (June). Fill each chart with Fibonacci lines. Find the characteristic shapes of five candles - fractals up and down.
Review of the euro / yen
It combined the currencies of two systems - the European and Asian-Pacific. The influence factors for each of the currencies are different. The Japanese currency is traded according to the speeches of the Ministry of Finance of Japan, according to reports of the Tankan Bank and on demand for Japanese-made equipment, taking into account customs duties and import quotas for North American consumers.
Although the list of factors influencing the euro will take half a page, the currency of the Old World is a fairly exponential monetary unit. "Japanese", on the contrary, makes sharp movements.
Significant changes in the yen during short trading periods are an increased risk, because the quote has an accuracy of two decimal places. For comparison: a bunch with the ruble has an accuracy of three digits, and in alliance with the Swiss franc reaches five decimal places.
But the volatility of the yen during the day makes profitable trading a pair of euro - yen. The most effective time of operations for this tandem is from 9 hours to 10 hours Moscow time. At this hour, both Asian and European platforms work. When placing a request to buy or sell, you should not forget about stop loss. In the trading practice of the pair, there was a case of a price change of 600 points during one trading session. Protect the deposit - put limiters on a sharp change in the rate.
So, euro / yen. As an illustration - a screen for June 26. Hourly time frame. Key levels: 125.87, 125.54, 125.07, 124.71, 124.06, 123.81 and 123.40. Since June 15, the pair has formed a local uptrend.
In case of breakdown of the level of 125.07, the price will go to consolidation in the range of 124.54 - 125.87. The above is not visible.
If the price drops to 124.06, a deep correction is possible with a trading in the range of 123.81 - 123.40. Deeper is not yet visible.
Advantages and disadvantages
The advantage of a fractal market analysis is its applicability to any instrument:
- stocks and bonds;
- goods;
- Currencies
- futures.
At any time interval, you can search and crush. But the accuracy of the forecast decreases with decreasing period: the prediction in the daily patterns is much more accurate than in five-minute ones.
The disadvantage is that the indicator is delayed. A fractal is formed only after the appearance of the candle following the minimum or maximum. That is, an incorrect reaction to volatility is possible. The fractal method is best suited for long periods when inevitable kickbacks are not critical for the player. Correction can be used to change your own volumes. At short intervals, you will have to use the figures in combination with other forecasting methods.
Apocrypha of the ancestors and associates
Novice traders should read the basic books on technical analysis.
The first on the list will be the essay “(Un) obedient markets: a fractal revolution in finance” by mathematicians named Mandelbrot B. and Hudson R. This is the ABC of fractal analysis of financial markets. It is time to forget about the simplified forms of everyday trading slang. Beautiful, sometimes even with vignettes, proposals, the writer explains in detail what and why, where and why is shifted from theory to practice of the game.
Having familiarized yourself with the basics of detecting fractals on the price chart of any exchange instrument, you should take care of the psychological component of trading. A second book will help, titled “How to Buy Cheap and Sell High: A Guide for a Prudent Investor.” The writer Naiman E. will tell you how to resist the pressure of the market crowd; how to increase the probability of a positive result by sober control of one’s own opinion; how to get out of poverty and keep all the family safe.
The third benefit to the trader is called Trading Chaos. Profit increase by technical analysis methods of widely quoted traders Williams B. and Gregory-Williams J. The book proves that chaos is the greatest order in a complex system, including market reality.
Saying goodbye to patient readers, we add: mathematics is the head of the whole world order. Following Fibonacci levels, Elliott waves and Mandelbrot fractals, young enlightened minds will create more than one theory for a developing market space.