FRIENDLY TREND FRACTALS
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In the June 2005 issue of “Stocks & Commodities” magazine in an interview
about “Following Trends” with Michael W. Covel he stated, “Historically,
trend-followers have made more money off currencies than any other
market”. Obviously this is a good thing for us currency traders.
No matter how you slice ‘n’ dice it trend following systems are the strategies
that ultimately work. Whether you are observing and trading along huge
trends on the large charts (i.e. daily, weekly, or monthly), or go to midsize
trends (i.e. on hourly charts), or go to the opposite end of the spectrum and
surf/scalp micro/petit trends, then you are engaging into trend following
strategies regardless of the scale. Essentially all trading relies on trends to
some extent – Fibonacci swings consists of smaller trends (minimum 3 main
trends consisting of countless smaller scale trends within those) within a
larger trend, range trading is simply trading along smaller trends within the
broader sideways trend, pattern breakouts are simply the start of a new trend,
moving averages and S.E.X. Lines indicate a trend (in fact all indicators
basically do), and I can go on and on pointing out how virtually any technical
trading method is simply an advanced adaptation of trend following.
There is a common expression known by traders; “the trend is your friend…
until it bends”. If all you were to do was to get good at identifying trends, in
any time scale, and know how to trade them then you will inevitably make
substantial profits.
I once came up with a saying (you may quote me) that was for a topic
unrelated to trading (so I’ll replace it with “X”) – “when you understand the
basic fundamental principles of how X works then all else are just
applications of those basic principles”. Thus I’ll extrapolate that quote here
to be applicable to trading – “when you understand the basic fundamental
principles of how the Forex market prices moves then all else are just
applications of those basic principles”. Prices of course move based on
market sentiment resulting from news and world influences, but as technical
analysts we are generally not concerned with that perspective (fundamental
analysis). The basic fundamental principle (meaning “basic principle”, not to
be confused with the financial definition of “fundamental”) of how the
markets move, from a technical perspective, is that the market moves in an
oscillating fashion (bouncing in waves) while gravitating in a certain direction
(up, down, or sideways). ALL trading methodologies are simply applications
aimed to capitalize on the understanding of that above stated fundamental
principle.
Simply put, trendlines show the confined range of oscillation as the markets
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gravitate towards a particular direction. When the trendline breaks it is a
chance to reevaluate the direction of the oscillations.
This oscillation is apparent in ALL scales of chart perspectives. I imagine the
behavior of charts to be similar to fractals in that the same patterns are
repeated within the various size scales. Because of this it is important to keep
the perspective that within larger trends there are smaller trend, within those
smaller trends are even smaller ones, and within those are even smaller ones,
etc… There are trends within trends within trends. Essentially the
oscillations within a trend are in and of themselves smaller trends that are
comprised of oscillations that are even tinier trends. Really understanding this
isn’t just some nice theory but rather is very practical when you know how to
apply this knowledge.
In earlier eBooks I stressed the importance of looking at the “bigger
perspective” and then narrowing your vision inwards by first looking at the
bigger charts then progressively looking at smaller charts. Here I will
elaborate upon the reasoning for this.
As with any spectrum, there are two extremes to the technical analysis of the
Forex markets. On one end you have tick charts, or the more practical oneminute
charts, as used by “scalpers”. On the other practical extreme you have
Monthly charts (each candle represents one month of trading activity), as
might be used by “position traders”. Despite the apparent difference these
two extremes are still showing you the same thing – historical market price
data presented visually, just zoomed in or out in perspective (think of fractals
again). Realize that even the Monthly candles developed second by second
just as the tiny one-minute and even the tick candles did.
The oscillations seem most chaotic when viewed on the tick candle charts;
mindlessly bouncing up & down, but even these tiniest of oscillations, though
it may not be apparent while watching them, are still gravitating towards the
oscillations of progressively larger oscillation/trends all the way up to the
grand scheme of things as seen on the Monthly charts. Thus even the tiniest
tick movement is contributing to the fulfillment of the big picture. A single
tick movement might seem as insignificant as a tiny atom, but remember that
your body is entirely comprised of a bunch of insignificant atoms, just as a
single Monthly candle is comprised of countless insignificant ticks. On the
molecular level things may appear purely chaotic, but there is an order to
things as the cumulatively order themselves as they form a baby from a single
cell into a full human being – just as tick movements build the full grown
Monthly candles.
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Ok, perhaps I delved too deep into this abstract topic, so let me back up a bit
and bring it into a more pragmatic perspective.
In that previous paragraph I stated that the tiniest end of the candle spectrum
is working to build the larger end. Thus if we observe the “big picture” we
can anticipate what the “small picture” is likely to do to fulfill the expected
patterns within the big picture. This is why we first look at the big picture
charts then work our way downward to finer and finer charts.
I am not going to do an in-depth review of how to find your trendlines here in
this eBook as this topic was adequately covered in the prerequisite eBooks
that you should have read by now. What is important to keep in mind is
identifying trendline breaks and trend reversal patterns as was also discussed
in those eBooks, as these are crucial to your success.
So to begin what you do is you look at the Monthly charts and identify your
trends.
Just looking at this Monthly chart you should see the beautiful (long term)
trading opportunities that were available. Notice how this chart looks just like
the smaller scale charts I’ve been showing you in my previous eBooks – had I
not told you the scale you wouldn’t know whether these are Monthly, Daily,
Hourly or even 5 Minute charts as the behavior of the markets in all time
scales is basically the same (think of fractals).
On the above chart I only drew the trendlines for the most prominent
trends. Look at that large up trend on the right half of the above chart. Notice
that there were a series of waves (Fibonacci) – each of those waves consisted
of a smaller up trend and a down trend; a big oscillation that continued
gravitating in the direction of the trend. I didn’t draw the trend lines on the
above chart showing these smaller trends, but you can imagine them.
At this scale it is important to watch for trends, trend breaks, and trend
reversal patterns for two reasons. (1) Knowing the predominant direction of
the gravitational force will have an effect on the smaller scale charts you will
usually be trading on.
(2) You won’t likely be trading on this scale, but if you
have the patience then why not let a trade run for years (enter by using a
smaller trade to get onto the larger direction, kind of like a “Running Scalp”
that will be discussed later in this eBook). At the very least you might let a
trade run for a few months if you have a strong trend.
Remember, major trendline breaks on a Monthly chart is a significant event
that doesn’t happen all that often (actually quite rare), so try to take advantage
of it when it does happen.
forex sato
showed about 7 years of candles, whereas this Weekly chart shows about 2
years – zoomed to give you a clearer picture. I just drew the most significant
trendlines on this chart so as not to clutter the chart with too many lines.
As you can more clearly see on this Weekly chart, the oscillations on the
Monthly chart are gorgeous tradable trends themselves. Notice the interesting
consolidation pattern in the middle of the chart – tradable for range trading,
but also a breakout pattern for the following trend.
forex sato
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