Fractal dimension Break-out and Break-in

As Bollinger says it is always better to ask the market what is going on than trying to predict it.

Ok let see some examples with this fractal dimension method of analysis. We are going to use the FGDI to identify fractal break-outs and break-ins.

Fractal break-out

I have explained what means a fractal break-out (a transition of the FGDI from blue to red or from red to blue).

Fractal break-in

A fractal break-in means when we are in red the FGDI goes further into red territory. That means that the movement being persistent gets more persistent. In fact those are the sweetest opportunities we can get from the FGDI.

The danger of the black noise

A black noise phenomenon. The black noise is frequent in the Forex market. It can be described as a radical change of the direction of the price time series, without any reversal technical configurations like double top, double bottoms, head and shoulders etc.

The black noise occurs almost always when we are in a red zone of the FGDI, so be careful.

OK let see the exemple.

The first mark is the break-out the FGDI moves clearly from blue to the red zone. We have an indication that a break-out is coming.

After that we have two break-ins the FGDI goes more into red territory. We have an intensification of the trend.

I have observed this phenomena a long time before starting writting on this blog and a particular strong correlation has been observed between the changes of the estimated fractal dimension and the price movements.

We have a black noise phenomenon we see that the price reverses when the FGDI is really deep into the red zone. So when we see that it is important what the FGDI will do. If it goes back to the 1,5 level we have a decreasing probability of continuation. The odds are for a correction.

If the FGDI is still in the red zone that may be a true reversal and the price would continue to go down. In this case the multi-frame fractal analysis helps and a volatility analysis helps also.

After that we have the FGDI going back to the 1,5 point. That means we are at the brownian motion zone, the price movements are believed to be random at this point. We can go to the blue zone (inverse fractal break-out) are having a break-in back to the red zone. In fact we do not know what is going to happen.

In this case we can use are knowledge in the statistically observed volatility. We know that at this time it is normal that the Euro could get a rest, and that is confirmed by the fractal dimension giving a structure more favorable for a correction and sideway movement than for continuation.

But rember those are only probabilities. I really recommend that someone who begins with this type analysis will use in the beginning only the clearly identified patterns. After that he mays found his own patters and use it more complex way.

So this example for today shows how we can obtain a structured analysis in difficult trading conditions. I find the fractal dimension analysis particularly helpful in detecting the market state conditions. And the market state will gives us the answer what strategy to use and to trade or not to trade.

The FGDI gives us an insight what is the mood of the time price series. An original idea is to combine this analysis with the implied volatility and the correlation.