Financial markets are Complex, IVon-Linear and Chaotic. Chaos is the highest form of order and posses a highly deterministic behavior. These chaotic market behaviors are represented by graphical structures usually initiated by a pattern called “Market Fractal.” Trader’s decisions are usually decided by complex series of events and these events influence price changes in the markets. Many times, all these events are rhythmically synchronized with Momentum, Volume, Time and Price. Price is the last one in this series to be effected. Traders get significant benefits from knowing the beginning of market structures (Fractals). It’s not easy to identify market “Fractals” but there may be a set of rules and patterns/events which may help traders to identify them.
“Fractals” are similar patterns which repeat themselves. A beginning “Fractal” pattern resembles the overall pattern of the entire market structures. Fibonacci numbers and Elliott wave patterns were first initiated by “Fractals”. On the expansion, Elliott waves consist of a series of “Fractal” structures.
In a simplest market form, as an example, a “Fractal” consists of 5 bars. After a prolonged downtrend in the markets, a 5-bar “Fractal” is formed to signal a potential change in the trend. This “Fractal” has three bars with higher highs and two bars with lower lows. Trades are initiated when another higher-high is formed after this 5-bar “Fractal”. A bearish “Fractal” is the reverse of the above.
As in any technical indicator, “Fractals” form, fail, re-fail and re-form. “Fractals” work in all markets and in all time-frames. Fractal theory is very powerful, but it does need confirmation indicators such as Momentum, Divergence and price-action to be valid.
Trading Fractal Patterns
Trading Fractal Patterns
The example above shows a “Fractal” pattern formation from the Nasdaq Emini futures (NQ) 610 tick chart. On March 29,2007, NQ futures were in a downtrend all day and lost over 20 points. At about 2:30 pm, NQ made a series of higher-highs followed by two lower-low bars to form a “Fractal.” This “Fractal” suggests that a down-trend may be over and a significant trend change may be in the works.
- After a 5-bar “Fractal” formation, wait for a bar to close above the previous bar’s high and enter a “long” trade above the previous bar’s high.
- Enter a “stop” loss order below the “Fractal” patterns low.
- Place a “target” at previous “swing high.”
Trading Fractal Patterns
The chart above illustrates an example of sell “Fractal” pattern from the Nasdaq futures (NQ). NQ futures rallied in the morning session and closed near 1808. A series of bars attempted to trade “lower lows” and “higher highs” to form a “Fractal” pattern. A trigger bar is anticipated for a short-sell after a “fractal” formation is complete.
- Wait for trigger bar, which is a “close” below the low of the previous bar to confirm the “fractal” setup.
- Short below the low of the trigger bar.
- Place a “stop” order one tick above the high of the trigger bar.
- Target a major “swing low” prior to the “Fractal” formation.