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.

AUDCAD shows good mid-week opportunity with lots of chop on each side,fractal steps not well formed

AUDJPY showing a nice trend reversal, no-trend periods are quite clear,fractal steps well formed

AUDUSD showing very clear trend reversal, chop periods easy to recognise, well formed fractal steps

CADCHF shows some small midweek opportunity, lots of chop otherwise,fractal steps not well formed

CADJPY showing clear reversal, low chop,  fractal steps not well formed

CHFJPY shows good reversal, low chop, fractal steps could be better

EURCHF shows good reversal, clear chop, nice fractal steps

EURGBP shows nice reversal, low chop, nice fractal steps

EURJPY shows clear reversal, low chop, good but steep changing fractal values

GBPCHF lots of clear chop, good but steep fractal steps

GBPJPY good reversal, clear chop, good fractal steps

GBPUSD Good reversal, clear chop,good support fractal steps, nice!

USDCAD very nice mid-week short opportunity

USDCHF nice short opportunity

USDJPY 2 good short opportunities, clear chop, nice fractal steps

Summary: I will continue to look at this system but would probably stick to the majors.

Plagiarism, The Sincerest Form of Flattery?

I get some strange requests! Actually, due to the way in which we all think, most requests to ourselves results in some form of counter-questions such as Why? What for?, and in my case How Much (big grin!). Forex, and in particular technical analysis, is a diverse sphere of interest, so big that knowledge of all the techniques and studies is beyond the limit of my memory. Following each customer request therefore comes a period of research/review, call it what you will, so that I can better understand the customer's problem. Now, sometimes there may be a language problem (which i see as my problem since I am not effectively communicating with my client), but generally one party is at a different level of understanding than the other, so I must make amends to get on the same level.

I firmly believe that there are not many original ideas in any subject, and that most innovations are a rehash of a previous work, maybe with a different bent. Only by sharing our original work I believe can we grow at anywhere near an acceptable pace.

Passing this work off as one's own, however, transcends, in my very humble opinion, even straightforward copying. It diminishes the reputation of both the original writer (who gets no credit or reward) and that of the plagiarist, who, once found out, has any credibility as an original artist, destroyed.

Given the availability of modern net-based delivery systems, and also the nature of the media to be copied, it is relatively simple to pass off a previous work as one's own. If ever I am asked to construct a forex robot/indicator/script, my very first course of action is to search the massive archives for something similar which already exists. If such a work exists, I can then inform the client that a free work is available (saving them time and money) or offer them a newly created work of my own device. If a client comes to me with a work which they want changing, I first investigate as thoroughly as possible the existing copyright notices in the current work, if any, and steer clear of anything that looks like its been wrongly obtained or copied.

So whats the point of this article? To show I am a goody two shoes? Nope (though I am - bigger grin). I want folks to use that great free internet firstly to understand what it is they really want, then to ensure no similar free work is available that does exactly what they want. And lastly, if you do find a commercial enterprise selling a work that has been clearly copied from someone else, remind others through whatever mechanism you see fit how they are being ripped off!

110409 - The Week In Pictures

A nice relaxing weeks holiday, now back to work .....

I've been researching some new methods. Whilst Watcher provides many points of interest, grid trading is a bit like watching paint dry! Luckily, my fantastic customers keep supplying me with new areas of interest, and some of the spin-offs from this (outside of what they have paid me for, of course!) keep me going in more ways than one. I have the utmost admiration for those folks who have been in the same job for many years, I often think it's a matter of making the job interesting each day.

I am a big fan of ZigZag, but very conscious of the fact that this indicator (like almost all other indicators) can only tell you were the price has been. ZigZag needs to experience a user-definable point change before it can consider whether price has Zigged or Zagged. I was unaware (shame on me) until recently that the Fractal indicator supplied with MT4, and I guess widely used, is repainting. In my defense, m'lud, I have never used this indicator myself, so probably would never have known. It's particularly surprising then, given the highly simple nature of fractals, that any such indicator should repaint. So basing a trade entry on Fractals.ex4 would either get you in on the trade early (the attraction) or get you in early on a false signal.

Lets define what I mean by a fractal. In this context, a fractal is a low or high point, generally indicated by a bar with 2 higher or lower candles on each side. So a down (support) fractal is a low bar, with two higher lows on each side. An up (resistance) fractal, is a high bar, with two lower highs on each side. Terminology may differ depending on the author. These are a useful indication of turning points, and also handy indications of where to place stops.

An additional use for me is to identify gross trend. Funnily enough, Watcher is counter-trend, but that's another story! So I have reviewed this weeks chart using a non-repainting fractal histogram indicator, comparing that with the Smoothed RSI Inverse Fisher Transform indicator. I assess each chart's suitability for range (grid) trading or trend (swing) trading. My manual analysis is now nicely reduced to assessing whether the fractal histogram is "stepping" up or down in nice even chunks, or not. Easy, no?

AUDCAD showing some nice steps in midweek, ranging elsewhere

AUDCHF Mainly ranging

Lovely mid-week stepping action from AUDJPY

AUDUSD again stepping in mid-week, is there a pattern here?

Remember we are looking for a number of clear steps, absent in CADCHF

CADJPY showing nice mid-week profit opportunities

CHFJPY stepping nicely for almost the first half of the week

EURCHF ranging, with very "blocky" fractals on the histogram

EURGBP showing 2 periods of stepping following a range at the start of the week

GBPCHF largely ranging, a staple gridding pair

2 very nice selling opportunities seen here in USDCAD

Choppy USDCHF with some late week stepping

USDJPY showing some early to mid-week stepping

In summary, I can see this becoming a complimentary strategy to Watcher, which tends not to accrue during such price action. Switching watcher off early is an option, but the idea in gridding is to accrue profit to overcome the drawdown suffered when a significant trend emerges.