Australian commodity trading adviser Edward William Dreiss was the first who started
to use fractal geometry as a way to measure price movements of different securities.
Fractals are mathematical tools that essentially divide large trends into extremely
facile and predictable patterns. For most traders fractals are considered to be
recurring patterns that can predict reversals in chaotic stock price movements.
When looking at price movement charts, sometimes it’s difficult to observe
whether the bars in the chart are referring to hours, days or months, if the time
scale is not given. The charts look the same, regardless of its time resolution,
with the only difference being the size. To examine these patterns the Fractal Chaos
Band Indicator can be used to determine what is happening in the current level of
resolution. Fractal Chaos Band is an excellent indicator to use in intra-day trading.
What Are Fractals?
By definition, fractals are mathematical objects that are self-similar irrespective
of scale. To put it more clearly, the surface of a fractal has features on a large
scale which are the same basic shape as smaller scale features, so when you look
at a fractal and zoom in or out, it still basically looks the same.
Applying Fractal Chaos Bands Indicator to Trading
Stock market moves in a highly chaotic way, but at a larger scale, the movements
follow a certain pattern that can be applied to shorter or longer periods of time
and we can use Fractal Chaos Bands Indicator to identify those patterns. Basically,
the Fractal Chaos Bands Indicator helps us to identify whether the stock market
is trending or not. When a market is trending, the bands will have a slope and if
market is not trending the bands will flatten out. As the slope of the bands decreases,
it signifies that the market is choppy, insecure and variable. As the graph becomes
more and more abrupt, be it going up or down, the significance is that the market
becomes trendy, or stable. Fractal Chaos Bands Indicator is used similarly to other
bands-indicator (Bollinger bands for instance), offering trading opportunities when
price moves above or under the fractal lines.
The FCB indicator looks back in time depending on the number of time periods trader
selected to plot the indicator. The upper fractal line is made by plotting stock
price highs and the lower fractal line is made by plotting stock price lows. Essentially,
the Fractal Chaos Bands show an overall panorama of the price movement, as they
filter out the insignificant fluctuations of the stock price.