The Fractal Nature of Technical Analysis

The Fractal Nature of Technical Analysis
A fractal is a geometric pattern whose general form is constructed out of smaller iterations of itself that repeat under increased magnification with infinite complexity. [18]  Financial markets have a fractal element to their price fluctuations, as the same types of patterns form on monthly charts, daily charts, and 1-minute and tick charts, and the larger patterns and trends are built out of the aggregation of compounded smaller patterns and trends. The micro scale influences the intermediate scale, which impacts the macro scale. If a trader can figure out what a market is doing right now, it may inform what happens for the rest of the day. If a trader understands today, that will give greater clarity to their view of next month.

Most technicians will ultimately spend the majority of their time on a chart resolution and study timeframe that works well in their market and for their methodology. It is important to look at the same product through a different lens from time to time, dropping down to a faster chart for intraday patterns or zooming out to a multi-year perspective to look for long-term trends. 

Tipping Points
The tendency of technical patterns to appear at all resolution levels of the data can lead to a circumstance where a small intraday pattern can have an outsized influence on the longer-term trend. Imagine a long-term downtrend experiencing a normal countertrend retracement to near the top of the downtrend channel, where on an intraday chart the market forms a bull flag. If the bull flag breaks out to the upside it may provide enough impetus to extend the countertrend and push the market outside of the downtrend channel, a neutral signal if not outright bullish. Conversely, if the bull flag fails then the countertrend movement is likely at an end and the long-term downtrend is intact.

JPEG Figure 4.13 Intermediate Pattern Macro Impact.jpg

Figure 4.13       Micro-level patterns that impact intermediate patterns that impact macro patterns. 


[18] The best-known example is the Mandelbrot Set, named after renowned mathematician (and sometime financial theorist) Benoit Mandelbrot.


From Chapter 4 - Technical Analysis, Pages 131-132.

To read more, click here. To purchase Trader Construction Kit, click here.

Excerpt from Trader Construction Kit Copyright © 2016 Joel Rubano. All rights reserved. No part may be reproduced in any form or by any electronic or mechanical means, including information storage and retrieval systems, without permission in writing from the publisher, except by reviewers, who may quote brief passages in a review.