What are fractals, what causes them, and how we can use them to improve our trading? It’s a subject worthy of a lengthy research paper, but hopefully this article [and the following excerpts to whet your appetite to read the full article] will be a good introduction.
The comments above and below are excerpts from an article from SeekingAlpha.com written by Andrew McElroy which has been edited ([ ]) and abridged (…) to provide a fast & easy read.
What exactly is a fractal? I use the term to cover a wide range of slightly different things, but technically,
- A fractal is a mathematical set that exhibits a repeating pattern displayed at every scale. It is also known as expanding symmetry or evolving symmetry. If the replication is exactly the same at every scale, it is called a self-similar pattern.
- A fractal tells us what direction to expect and what the move could look like. At their best they provide a map into the future.
- The best fractals of all are found when you can identify a feeling the market is giving you and when you have felt it before. It starts with something like deja vu; ‘I’ve done / seen / felt / traded this before’.
- Surprise events can knock fractals off course, either temporarily or permanently. We can’t expect a repetition to carry on forever or the market will end up eating its own tail.
- When analyzing the markets it’s best to keep an open mind; fractals don’t always have to make sense.
Do fractals work? Well not all of the time, but hopefully there’s enough evidence…[in the full unabridged article] to show they can help with trading decisions.