Why You Should Care About Fractals

Judging by the thundering silents it seems that almost none of you realized the significance of being able to assess time series fractal statistics. Once again it falls on the lowly market mole to elucidate and reveal you the error of your collective ways. As you all know – if necessary I will drag you crusty butts kicking and screaming into the 21st century. If you still think that drawing lines on a chart gives you a competitive advantage then 1991 called -they want their MOTORAZR back. Sometimes I wonder why I bother…

2014-09-23_spoos_update

Anyway, before we get to all that a quick visit to the equities side – not looking so hot over there and it seems the spoos are going to take a b-line to the 100-day SMA. Today’s failure at the 25-hour SMA pretty much sealed the deal here. I don’t see a good entry opportunity except maybe if we see a bit of a bounce near the EOD:

2014-09-23_NQ_setup

The NQ has been pretty stubborn today and that’s why I would take a long on a breach of today’s highs tomorrow. It still enjoys support from below via the 25-day SMA and a daily NLSL at 4019 and a quarter. Let’s see if it can close the session above and then we talk. Until that happens I’m on stand-by mode on all things equities.

Alright, now let’s talk fractals, folks. So, why should you care about them? Well for one they can be pretty – see Mandelbrot et al. And they can be profitable - if harvested properly they offer us statistical edge – very simple. And that in turn leads to profits – ka-ching!

In order to prove it to you guys and myself of course I coded up some basic reporting based on the Fractal Monger code I put together last weekend. It was rather basic – all I needed is to parse through my list of 50,000 candles and sort all fractals into a sorted list. Each fractal entry contains is higher, lower, equal, and of course total closes. From that I can do some sorting and in the process extract the respective ratios – i.e. higher vs. lower closes and the inverse. Let’s take a look at what I found starting with the 60 minute ES futures:

2014-09-23_EURUSD.60minute.fractal.highers

Shown here is are the top scoring higher closing fractals – my cut off threshold is 1.5, meaning I want to see 3 higher closes for every 2 lower closes. That btw will be my filtering threshold for the Fractal Monger notification module starting next week. The fractal on the very top is a pretty sweet one and in the past eight years (50,000 hourly candles leads us back to roughly to September 2006) it has only stuck 46 times (total closes). It  closed higher 33 times and lower 13 times, giving us a ratio of 2.54 – I take those odds every time.

As you scan down the list the ratio slowly drops toward 1.5. In total we would have had 1665 entries in the past eight years – that’s roughly 420 weeks and that’s almost four per week! That actually struck me by surprise as this is only one direction on one symbol. Thus we may be able to scale it back to a ratio of 1.65 or higher.

2014-09-23_EURUSD.60minute.fractal.lowers

And here’s the lower equivalent. This time we are rating short fractals – meaning we would want to go short when they trigger. Top scoring has stuck 67 times – not bad and the total on the short side is 1622 – almost the same as the long side. So that puts as at 8 hourly fractal patterns per week for just one lousy symbol. Are you paying attention yet?

2014-09-23_ES.60minute.fractal.highers

Now let’s look at the EUR/USD – here we have a top scoring higher close fractal with a ratio of 3 – it’s a rare beast but when it hits I will be there to either go long or grab myself some binary options for a bet higher. The total number of high scoring fractals comes out to 1739 – almost 4.2 per week.

2014-09-23_ES.60minute.fractal.lowers

The short side is a bit weaker and we’re counting 1209 – about three per week. So if you count those two symbols together we are at about 15 entries per week on average. Obviously there is no reason to not run Fractal Monger on at least 20 symbols out there. This would probably allow us to crank up our ratio filter to around 1.7 or higher.

Now let’s take a look at one that was triggered on the ES futures during a few hours of testing the messaging system today. This is actually how the email looked like as I managed to get that HTML format working.

Current Fractal

2014-09-23_1607

The current fractal has occurred 62 times in the past.
It ranks as the 164th most frequent fractal during the past 50003 bars.
The next candle has closed higher 37 times, lower 23 times, and equal 2 times.
Frequency of occurrence: 0.12%
Higher/lower ratio: 1.6
Lower/higher ratio: 0.6

Pretty sweet, isn’t it? The higher ratio was 1.6 and that would have been above my desired 1.5 ratio threshold. And it DID close higher. Just one example – let’s see how we flow. For now I want to see how many of those we get. Then next week I’ll turn on the ratio filter of 1.5 and add more pairs and other symbols. This should be fun! :-)

By the way, I also switched to 5-digit fractals after some extended testing yesterday. I may also slightly modify the normalization algo to be a bit more precise..

Alright before I run – two more setups are waiting below for my intrepid subs:


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Cheers,

Substandard High Intensity Tape

In the past week we have been seeing increasing volatility in all equity indices – as of right now we remain locked in a limbo period (for more info on the definition please point your browser to my pertinent post). In a nutshell the implications here are to a) stay the heck out or b) play the swings to your best abilities.

2014-09-05_spoos_update

Now when it comes to limbo tape there are of course various flavors. All of them are highly volatile of course as the idea is to produce maximum amount of noise in order to draw impatient participants into emotional trades. Revenge trading and tape chasing is the order of the day and market makers usually love every minute of it. But there is one flavor that’s particularly nasty and it’s the type we’re stuck in right now – long wicks combined with small real bodies and all that in a sideways trading range. The technical term for it is Substandard High Intensity Tape – or more commonly referred to as SHIT.

2014-09-05_spoos_ST

Suffice to say that if you happen to come across SHIT tape you stay the [insert expletive of your choice] out.

Seriously speaking however – this thing should have been resolved by now and the more it coils up the more explosive I expect to be its resolution. Unfortunately I do NOT see any directional signals here that I would feel comfortable considering, let alone use for anything but intra-day swing trades. At this point we should embrace the fact that we do not know which way it’ll turn, at least not yet. And if that means we may miss the rocket then that’s okay. This is the type of game you’ll only win by not playing.

2014-09-05_shut_up

Alright – I know: “Mole, shut the hell up about your damn Dollar campaign already!” I apologize for having to post this chart again but there has been a change. Given the current velocity I have decided to set my trailing stop to 15% MFE and turn it into a monthly campaign. I am certain a shake out is coming soon here but I now see the potential for a run into 85,

2014-09-05_Dollar_PNF

I looked at several intervals on my P&F chart and ~85 seemed to be the consensus. So let’s see if it plays out.

Two juicy commodity setups below the fold – so please grab your secret decoder rings:


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Alright, I think we’ve done enough damage for this week – it’s been fun. And you all know what comes next for the Mole:

beer3

 

That looks about right. (the beer of course)

Cheers,

So Far So Good

Apologies for my relative absence today – for one until now there was little to add to yesterday’s perspectives, and second I’m running a bit thin on time today. So let’s cover the basics:

2014-08-28_spoos_upate

If you recall – I pointed at the 100-hour SMA as our inflection point for a drop toward the lower Bollinger. That very scenario played out overnight and since then we’ve bounced back and are in the process of recovering the SMA.

2014-08-28_uvol_dvol

It’s possible that this was simply a little stop run to shake out some weak hands. The UVOL/DVOL ratio seems to suggest just that. If you look closely the previous sessions ran pretty much on remote control but last night’s sell off took a few folks by surprise (strangely) – at minimum it triggered a series of stops. Now we need to hold the 1996 mark in order for the party to continue – if we drop back below and the cash closes in the red then we probably are looking at a more extended correction. In which case I may consider closing out some of my NQ longs – thus far they’ve barely broken a sweat.

2014-08-28_copper_setup

Nothing of substance on the setup side today – except copper which is looking like a pretty good long here. Now don’t read this the wrong way – I’m not saying that copper has high odds of jumping higher. Actually, it’s more of a 50/50 scenario - however we are sitting on double support and that puts the odds in our favor IF (and only if):

  • We close above the NLSL and SMA today.
  • We hold that mark into tomorrow.

So I am taking a calculated risk here near a potential inflection point – 50/50 odds right now but it’ll increase rapidly the more time we spent here. All that translates into a potentially high payout for a small risk (i.e. my stop is but a few ticks away). Ergo I’m attributing 1/2R here and then will add 1/2R if not stopped out by tomorrow after the NYSE open. If she holds here then a jump higher in the coming week would have very good odds.

It’s not too late – learn how to consistently bank coin without news, drama, and all the misinformation. If you are interested in becoming a subscriber then don’t waste time and sign up here. The Zero indicator service also offers access to all Gold posts, so you actually get double the bang for your buck.

Cheers,




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