Fractal Market Mastery

By Andrew McElroy

Fractals are all around us and prevalent in financial markets. The same patterns recur as we repeat the same behaviours. It often happens without anyone noticing.

   

But what if you could anticipate the next repeating pattern? With a fractal 'map' to future price action, you could be confident of the market's next move. 

 

'Fractal market mastery' is a practical guide to trading with the aid of fractals. With nearly 60 charts and examples, it provides new insight into price action, market behaviour and how trends develop and unwind. 

 

• Language: English
• Publisher: Andrew McElroy
• Release date: Jan 28, 2023
• ISBN: 9798215027912

Book preview

1. Introduction to Fractals

A fractal is a mathematical set that exhibits a repeating pattern displayed at every scale.

We see fractals constantly, particularly in nature. Ferns repeat the same pattern through smaller and smaller fronds.

A close up of a tree branch Description automatically generated with low confidence

Source: Wikimedia Commons

Dandelions have amazing fractal symmetry, as do most trees. In the fractal tree coded below, two branches are coded from any given branch until they get so small, they can’t be seen.

A black and white drawing of a tree Description automatically generated with medium confidence

Source: rossettacode.org

When translated into the markets, fractals look like this:

Diagram Description automatically generated

This isn’t a perfect repetition, just as a real-life tree is not as perfect as the coded fractal. It is important to never expect perfection in anything with so many moving parts. In the same way that a dandelion pappus may blow away from the head, or a tree branch may snap, market patterns can be ‘blown’ around by a number of external factors (news, large orders, lack of liquidity etc...). Nevertheless, we can still identify a repeating structure and it can be useful to think about the broader character of the fractal.

In the oil (CL) example above, the first failed break out above $50 led to a reversal lower and a decline to $26 where a ‘V’ bottom reversal led to a rally and a new high above $50 again. Oil then repeated this behaviour in a smaller iteration and it could be speculated it would do the same again (the arrows on the chart). This is where the magic (and profit) happens – we have a potential ‘map’ based on the previous pattern and we can base trades around it. This article on Seeking Alpha used the fractal to predict a rally and advised to get long. Oil soon reversed at $42.95 and followed the arrows higher, reaching $56.18 by the end of the year.

2. Fractal Formation

When committing money to any method of trading, it is prudent to question why it should work. What is the logic? What is truly going on?

Fractals form in nature as the most useful and efficient structure is repeated. Human lungs and trees have remarkably similar anatomies as they both aim to maximise surface area for gas absorption. Furthermore, trees manage to do this without compromising strength and stability.

Leonardo da Vinci recognized nature's ability to from efficient structures 500 years ago when he wrote all the branches of a tree at every stage of its height when put together are equal in thickness to the trunk.  This suggests if the tree were to have its branches gathered and compressed, it would have the same thickness from top to bottom. The rule was tested