Fractal Geometry & Multiple Time Frames
As in charting, and trading overall, applying multiple time frames is an art form. The key to time frames is the direction on the higher time frames, but it is only the current direction, or short-term trend we are interested in on that higher time frame chart. Just as important as the current trend is being able to identify the when/where that last shift took place.
In mathematical terms a price shift can be referred to as an iteration. Technically an iteration is the repetition of a sequence of operations geared toward a result. Theoretically that result in trading would be a price point that the maximum number of participants find agreeable. Realistically that result will never be achieved because of the dynamics of the fundamental underlying structure of the marketplace, which is the business cycle, and the emotions of individuals. Just as economies ebb and flow and individual business’ come and go, markets cycle up and down in trends or waves. The only thing we know for sure is that price will surely change, or shift, and the next trend will play out again, and again, and again. Knowing change will occur emphasizes the importance of being able to define the where, when and how of that change, or iteration. Because the nature of fractal geometry is that each successive internal, or lower level is just a slightly more complex version of the previous external, or higher level, the larger appendages, or higher time frame construction, will appear more simple. Our arm looks relatively simple; it’s one appendage and has three major joints, or iterations to it, while the smaller hand is more complex in that it has 5 minor appendages with each one having 3 joints each for a total of 15 iterations. Similarly a longer-term chart has less iterations, or trend shifts, than a shorter-term chart. Likewise the more short-term you drill down the quicker the iterations will occur. The where, when, and how of trend shifts is the same on a Monthly chart as a 1-minute chart, but because they occur much more often on the 1-minute chart and we are seeing a much larger number of them, the variation gives us the appearance that they are more complex. Those same variations also insure that a computer program will oscillate between being too early and too late to identify that shift. It is true that by knowing the when, where and how of trend shifts, that given the time you can take advantage of them on the short-term time frames for as long as you can maintain your discipline and focus. It is also true however, that given we all have to sleep, and generally have lives outside of trading that we will find it much easier to trade lower time frame charts in the current direction of the higher time frame charts. It is better to catch a fish as long as your arm, than one as small as your little finger.
Below is a Weekly AUDUSD chart w/ the short-term trend shifts marked:
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Jay Norris is the author of Mastering the Currency Market, McGraw-Hill, 2009, and a Senior Market Strategist with BrewerFX.com
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Interesting but I believe it can only be applied for historical charts.