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Fractal Analysis?

Discussion in 'Technical Analysis' started by youngtrader, Sep 1, 2007.

Can anybody explain what this is and how traders use it in the markets? Is it the same thing as chaos theory and what is that? Sorry about all the newbie questions but I would like to know more about these stratagies.

2. n00b7r4d3r

I am not an expert on any of this but I have done some reading on these subjects as i find them interesting myself. From what I have found I dont think there is any kind of huge edge you can get from these subjects in the markets but that is not to say that they are useless. I think they could give you a usefull prospective if you were to build your own paradigm on them.

A fractal is basically a geometrical shape that always has more detail when you zoom into a smaller part of it (think of acumulation markup distribution decline on a scale of decades then years then days hours etc). How does this make you money? I have no idea.. since the markets are not deterministic in their iterations on the smaller scale i dont know how this would give you any predictive value. Maby you could build a theory that microscopic price action will have a greater probability of reflecting recent macroscopic price action?

This is the guy who started fractal analysis. It is interesting because he also did some work in economics

http://en.wikipedia.org/wiki/BenoĆ®t_Mandelbrot

Chaos theory (i think) is basically dealing with functions that are so VERY dependant on initial conditions that a VERY small change can give you completly different results. Basically the results are deterministic (non random) but you would need an infinite amount of accuracy to calculate the output. I dont know enough about chaos theory to give any idea of how you would make money using it (I think it would probably be based on finding out somehow what the output is statistically more probable of being given a range of input values that are close but not perfect).

3. slacker

http://transcripts.fxstreet.com/fractals/index.html

A quick description of an indicator used to measure the polarized fractal efficiency of a time series.

http://www.paritech.com/paritech-site/education/technical/indicators/trend/polarized.asp

You can get a very good article on the subject in the Jan 1994 issue of Stocks & Commodites mag.

Some believe it can be used to determine trends.

Multiple applications of PFE make a great chart in appearance but as with all indicators the value is in how much it can help you to trade.

I used it for a while with other indicators and felt the lag was too long and no longer use it.

People don't.

If you want to know about a bunch of workable strategies buy John Hill's The Ultimate Trading Guide.

They have to use this as a stratagy. There are many books on chaos theory and such. I have also heard of people using fractal analysis to trade on. Maybe I am wrong though. Is it mathematical numbers or what? I am a little sceptical on the whole trade off of math equations and science because I just don't see how it fits in the market. Any help on this is greatly appreciated because it does have me wondering.

6. no. 22

Check out Spydertrader's Jack Hershey Futures journal. There are some math, science and engineering terms used there, even "fractal."

7. kut2k2

Forget about Chaos theory; it is based on deterministic systems that produce unpredictable but definitely nonrandom results. An analogy would be finding the next unknown digit of pi, which is unpredictable but completely nonrandom because it can be calculated, at least theoretically. The markets are only quasi-deterministic; chaos theory doesn't apply.

There may be something to fractal analysis of the markets but anyone who knows something practical isn't talking about it much, beyond the PFE which you've already been told about.

Some have drawn connections between Elliot Waves and fractals but you'd best go down that road with caution. Good luck.

8. cnms2

When talking about trading, I use interchangeably "fractal" and "time frame / scale". So I'd say that "fractal analysis" refers to an analysis done over several time frames. I.e. you trade on the daily chart, but also analyze the weekly and even the monthly charts, to see the bigger picture. You may also step into a faster "fractal" to get a better entry.

There may be other usages too. Google it ...

9. nazzdack

Maybe this'll help. I'll make an analogy to Market Profile to explain Chaos Theory. (1) A market makes a strong, directional breakout move (aka---"range extension" or "chaotic movement"). (2) The market reaches a point where it is reversed and the market profile begins to develop (aka----"value acceptance" or "coherency"). (3) Eventually, the profile is completed and the market goes "dead" (aka---"efficiency" or "transition phase"). (4) The market makes a strong breakout and repeats the same cycle of events, in multiple time frames (fractal behavior). Instead of being distracted by goofy math equations, focus on identifying where the market is with respect to the cycle of events in the time frame you're operating in.

10. jimrockford

Fractal analysis, as a form of technical analysis for traders, has nothing to do with chaos theory or fractals. The people promoting fractal analysis for trading falsely claim that it has some connection to fractals or chaos, simply because this is a clever and effective way to generate interest in bogus technical indicators. Lots of trading authors and vendors throw around the terminology of fractals and chaos theory, as a marketing technique, even though their writings have no true basis either in fractals or chaos theory; and these people usually don't even have any understanding of either fractals or chaos theory.

People who refer to different time scales of the same price trajectory as different "fractals" are also misusing the terminology of fractals.

Fractal mathematics definitely has very interesting things to say about markets. Chaos theory may also someday be shown to have something to say. The vast majority of authors who talk about these topics, in the context of trading, don't know anything about them, and are essentially charlatans.

#10     Sep 4, 2007
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