Financial Programming Services: 110423 - The Week In Pictures (Fractal Edition)

Introduction to trading with fractals

As far as forex is concerned, the accepted meaning of a fractal is a price pattern which repeats (with different magnitude) in higher or lower time-frames. In Elliot wave theory, impulse (advancing in the direction of the major trend) waves, and corrective waves (against the trend) are understood to occur in every increasing magnitude once noise is separated out. To me, this is a bit like reading tea-leaves, I often see what I am looking for, which may or may not predict the future. Fractal (Chaos) practitioners will look for these different magnitude repetitions, and use one to predict what will happen (or understand what is happening) in the other. Trades are entered/exited accordingly. This reinforces my theory that the best traders are those that have a lot of experience and a good feeling for the charts.

My interest was provoked by the recognition that the standard MT4 fractal indicator repainted. I try to avoid such indicators, especially where this repainting leads to later prints differing from earlier ones. Often, this repainting cannot be seen unless one watches the chart closely either live/demo and tick-by-tick. I always perform a quick code read to determine whether such repainting will occur, so that I have a better understanding of whether it is due to necessity, or laziness on the part of the original programmer.

For my personal use, I now only use my own NonRepaintingFractal and NonRepaintingFractalHisto indicators. All of the below charts use these.

The fractal (rather than the fractal pattern) itself is formed by two or more higher lows ("support fractal") or lower highs ("resistance fractal") on each side of a particular bar closing price.

Support fractal

(Note that there appears to be a missing candle to the left of the fractal. This is in fact a "doji" candle of which the wicks are lost due to the colour scheme used. I explain the other lines below.)

If we identify these fractals, and draw a histogram of the latest support and resistance fractals, it looks like this:

(Can you identify the support fractal from the first picture?) From the left of the chart, we can see the price declining, until it reaches our support fractal, and then it starts to rise again. See that the resistance fractals step down nicely with the price fall, then the support fractals step UP nicely with the rally. By nicely, I mean that there is little or no interruption in that all successive resistance fractals are lower than each other, and all successive support fractals are (generally) higher than each other.

So what is this showing us? How can we use this to trade?

What we have to this point is, at the very least, a mechanism for determining where to place stops. We will use the support fractal values for a BUY trade and the resistance fractal values for a SELL. Now all that is missing is major trend determination (trade with the trend) and, most importantly, trade entry timing to avoid chop (those periods when the price just meanders without taking a general direction).

For the trend determination, I use my LinearRegressionChannel indicator (Yellow parallel lines with magenta centre line). This is a modified LRC which adjusts the channel to "hug" the price series, allowing one to see where price is likely to bounce off or break-through (actually widening the channel). On a H1 chart, this indicator is used to show the hourly/daily/weekly trend (since on my screen anyway, a H1 chart covers the whole week). I use an input of 120 hours. We can see the whole month trend by just switching charts to the H4 timeframe (since 4 weeks = 1 month) and similarly switching to D1 gives 6 month trend.

As for trade entry timing, in the above and all following charts I show some techniques from the Bill Williams' Chaos method. The AO (Awesome Oscillator) is the difference between the 5 period moving average and the 34 period moving average (MA5 - MA34), red bars show declines, green show price increases. We consider whether or not to trade based on where the zero line is crossed.

The red, green and blue indicator lines in the chart window are the Alligator indicator. This is supposed to show periods where the "Alligator" is eating and periods when it is sleeping, and was apparently derived by computer analysis.

I tend to use the times where the price has bounced off the LRC, blue is above red which is above green (SELL) or blue is below red which is below green (BUY), following an AO cross.

This technique is useful for those pairs where strong/long trends occur, since the trade is entered following clear establishment of the new trend. Stops are placed at (or offset slightly from) the most recent fractal value.
As the fractal levels step, so the stops are moved.

Whenever monitoring multiple pairs, we don't want to be continually switching charts and timeframes, so I use my AwesomeAlarm indicator to Alert me when the Awesome Oscillator crosses. It also draws historic vertical lines in red (short opportunity) or green (long opportunity) for sake of clarity.

I took the opportunity this week to assess the suitability of this method for the usual currency pairs.