What is a fractal analysis
Fractal analysis is a kind of artistic perception of an object within the boundaries of identical geometric figures.
For example, the mistress bakes in the oven atrectangular baking pie. The finished product cuts into the same rectangles, reminiscent of the shape of the whole product. In portioned pieces, the color, taste and composition are the same as that of the whole pie. The fragment of the pie and the whole pie are identical in all. The cut pie can be called a fractal. Because the whole consists of similar pieces.
The essence of the object
The principle of similarity is also applicable in exchange trading. The prices of market instruments are considered on long and short timeframes and find striking similarity in the behavior of the chart on the minutes and the other day, for example.
The theory of fractal analysis was sounded in the lastquarter of the twentieth century. The new word was introduced into the use of market science mathematician Benois Mandelbrot. The researcher replaced the word "recursion" with the Latin "fractal" that was full of nausea. The American and French scientist gave the financial world a method of investigation by the method of sequentially breaking the intervals of observation and searching for symmetry on the charts of long and short price movements.
Understand geometry and win
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, the fractal is displayed if a symmetrical figure is fixed:
- for the green fractal "up" the last two candles on the left and right of the central display prices below the maximum;
- for the red fractal "down" the left and right candle pairs should show above the minimum.
The number of candles in a combination can be increased. It is obvious that for 9 candles the groups of candles on the left and on the right consist of four periods.
When you overlay a price chart, the fractal is denoted byshort arrow. Fractal "up" shows the price increase to a maximum at the selected period of time, and the fractal "down" displays a minimum at the same time interval.
The practice of trades has systematized fractals into:
- Standard, when the average 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 collision of interests of sellers and buyers. The market at this point should choose one of the directions of the movement.
Application of fractal analysis
The division of the whole into many similar figures is applied in many branches of knowledge, for example, such as:
- mathematics;
- architecture;
- economics and finance;
- design.
Our article is addressed to the reader with exchange interests.
All price series have the propertystatistical similarity. Minute, hourly and daily charts with fractals look the same so that if you exclude the marking of the coordinate axes, you do not know what period is being considered.
Methods of fractal analysis
To describe the price evolution of the exchange asset and the subsequent forecast of the course of the price on any time periods, the fractal math is applied based on the R / S analysis algorithm.
The dimensionless value of the ratio of the spread R of the observed parameter to the standard delta of observations S is the basis of the method of normalized analysis.
To estimate the strength of the trend on the asset chart and the level of random price wanderings, one can use the method of analyzing the normalized span to exceed 0.5.
The meaning of computations and constructions consists indetermining the color of information market noise. The algorithm of the method involves calculating the Hurst index H - the fractal characteristic of the analyzed time period - and also the noise quality:
- 0,5 ± 0,1 - "white noise"; chaos of the time period; forecast of a low degree of reliability;
- ≥ 0,6 - "black noise"; orderliness of chaos; the strength of the trend; the forecast of high reliability;
- 0.3 ± 0.1 - "pink noise"; antipersistance zone- a change in the growth direction of the increment to the opposite: growth in the early periods signals a decrease in the future, and vice versa, a declining trend in the past increases the probability of growth in the future.
For "manual" trading this is too burdensome construction. 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 the large volume of trading.
Of course, the preferences in the choice of currency traders vary. But for studying it is useful to study the graphs of popular pairs:
- euro / dollar;
- pound / dollar;
- dollar / yen;
- euro / yen;
- Australian dollar / dollar.
To stuff your hand, open a demo account at anybroker. Connect the trading program and display on the screen separate sheets of currency pairs for the current month (June). Fix each chart with Fibonacci lines. Find the characteristic figures of the five candles - fractals up and down.
Euro / yen pair review
Here the currencies of the two systems were united -European and Asian-Pacific. Factors of influence in each of their currencies. The Japanese currency is traded according to the speeches of the Ministry of Finance of Japan, according to the reports of the bank "Tankan" and on demand for Japanese-made equipment, taking into account customs fees and import quotas for North American consumers.
Although the list of factors affecting the course of the euro factors will take half a page, the currency of the Old World is a fairly robust monetary unit. "Japanese", on the contrary, makes sharp movements.
Significant changes in the yen's exchange rate in the shorttrade intervals constitute an increased risk, because the quotation has an accuracy of two decimal places. For comparison: a bundle with a ruble has an accuracy of three characters, and in alliance with the Swiss franc reaches five decimal places.
But the yen's volatility during the day makesprofitable trade with a pair of euro - yen. The most effective operation time for this tandem is from 9 o'clock to 10 o'clock in the morning Moscow time. At this hour, there are Asian sites, and European ones. When you place an order for a purchase or sale, you should not forget about the stop-loss. In the trading practice, the pair recorded a case of a price change of 600 points during one trading session. Take care of the deposit - put the limiters on a drastic change in the rate.
So, the euro / yen. As an illustration - screen on June 26. Time-based time frame. Key levels: 125.87, 125.54, 125.07, 124.71, 124.06, 123.81 and 123.40. The pair has been forming a local uptrend since June 15.
In the event of a breakdown of the level of 125.07 the price will go to consolidation in the interval 124.54 - 125.87. You can not see above.
With the price drop to 124.06, a deep correction with a trade in the range of 123.81 - 123.40 is possible. Deeper is not yet visible.
Advantages and disadvantages
The advantage of fractal analysis of the market is the applicability to any instrument:
- shares and bonds;
- goods;
- currencies;
- futures.
The drawback is that the indicatorlate. Fractal is formed only after the next following a minimum or maximum of a candle. That is, an incorrect reaction to volatility is possible. Fractal method is best suited for long periods, when inevitable kickbacks are not critical for the player. You can use the adjustment to change your own volumes. At short intervals, you will have to use shapes in combination with other ways of constructing the forecast.
Apocrypha of the ancestors and associates
Beginners should familiarize themselves with the main books on technical analysis.
The first on the list will be the essay "(Ne) obedientmarkets: a fractal revolution in finance "by mathematicians named Mandelbrot B. and Hudson R. This is the ABC of fractal analysis of financial markets. For the time being forget about the simplified forms of everyday trading slang. Beautiful, sometimes even with vignettes, suggestions, the writer explains in detail what and why, where and why is shifted from theory to practice of the game.
After reading the basics of detecting fractals onprice chart of any exchange instrument, you should take care of the psychological component of the trade. The second book with the title "How to buy cheap and sell expensive: A Handbook for a Reasonable Investor" will help. The writer Naiman E. tells how to resist the pressure of the market crowd; how many times to increase the likelihood of a positive result with sober control of one's own opinion; how to get away from poverty and maintain all the safety of the family.
The third benefit to the trader is called "Trading chaos. The increase in profit by the methods of technical analysis "of widely quoted traders Williams B. and Gregory-Williams J. The book proves that chaos is the greatest order in a complex system, including in market reality.
Saying goodbye to patient readers, we add: mathematics - the head of the entire world order. Following the Fibonacci levels, Elliott waves and Mandelbrot fractals, young enlightened minds will create more than one theory for the emerging market space.
