Monday, February 13, 2017

Fractal Trading Using CELG

You may have heard before that markets are "fractal". Well what does that mean and how do we apply it?

A Fractal is defined as: a curve or geometric figure, each part of which has the same statistical character as the whole. Fractals are useful in modeling structures (such as eroded coastlines or snowflakes) in which similar patterns recur at progressively smaller scales, and in describing partly random or chaotic phenomena such as crystal growth, fluid turbulence, and galaxy formation.

Simply put patterns in nature seem to repeat in similar shape or dimension on any scale. We see this fractal behavior occur in financial markets as well. Seeming chaos can actually be reduced to simple patterns that play out across multiple timeframes and in different magnitude.

For an example of this phenomenon lets take a look at Biotech giant Celgene (CELG):

 On the long-term Monthly chart we can see this "flag" like formation following a strong rally. After the stock moves higher it undergoes a period of rest in an orderly and somewhat "flag" or triangle like pattern.


The Weekly chart zooms in on the larger Monthly pattern and we can see following the sharp November rally price then underwent a rest period in a similar "flag" shape as the larger pattern above. 

 Taking the timeframe down a step further to the Daily it shows another sharp rally to end January and is now in a period of rest in a similar pattern.

 Finally zooming into the intra-day action on the Hourly chart we can see today's action with a sharp rally at the open of trading and then a rest period for the remainder of the day. 

This "flag" pattern is not unique to the fractal phenomenon, there are many other examples of how patterns repeat across all timeframes in financial charting. But it should be noted that any of these formations can be traded within their own time periods for similar relative results. 

I prefer to use these patterns as confirmation of each other. When I see a stock displaying similar behavior on all major timeframes it gives a hint to how it will trade moving forward. None of this is directly predictive but it gives us a method for managing risk and making effective moves within a seemingly meaningless set of lines on a graph. 

In this game pattern recognition and risk management are the two most important aspects of success. It is critical to understand how prices behave across multiple timeframes and how to position in sympathy with that action until it changes.