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| From The Desk of The Trader |
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“If you take your thumb and your index finger and look right where they meet - go ahead and do that now - and relax your hand, you'll see a crinkle, and then a wrinkle within the crinkle, and a crinkle within the wrinkle. Right? Your body is covered with fractals.”
-- Ron Eglash
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FAF19 Day 8 Lesson 7 12 February 2019 |
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Daily Goal: 60 Ticks
Max Contract Size (Per Trade): 3 (Margins $700; acct balance over $2100)
Performance: +71 Ticks on 24 Contracts
Summary: Stocks broke out to the upside today completing the pattern started a couple of days ago (on the daily).
Recap Video: Click the image.
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Today’s Trading Lesson: Fractals
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Websters Dictionary defines fractals 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 [or stock charts].”
I added that last bit.
That’s the fancy definition.
Here’s a more practical one for trading… Everything that happens on one timeframe happens on all other timeframes… it’s only a matter of degree.
Said another way… if I gave you several charts, that didn’t have time or price data, you’d have a hard time identifying which time frame is which.
Don't believe me?
What are the timeframes for the charts below? |
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Can't tell?
Don't feel bad. There really is no way to tell.
How does that help your trading?
Simple… smaller timeframes allow you to keep your risk small (distance from entry to stop) because the range (distance from high to low) on each candle is generally smaller than that on higher timeframes.
For example, the current 14 Period Average True Range on the daily chart of AMZN is approximately $50. The 14 Period Average True Range on the AMZN 15 minute chart is about $3.25. This means that the average high to low range per day is about $50 while it’s $3.25 on the 15 minute chart.
As a practical matter that means your stop on trades based on the daily timeframe is approximately 15 times larger than that on the 15 minute timeframe.
Now the astute observer is likely to say, “Yeah… maybe… but the profit targets are likely 15 times larger on the daily timeframe as well.
Point well taken, but remember… a trader’s first job is to minimize risk… so just on its face that’s exactly what intraday trading does.
Another benefit of trading smaller timeframes? Not only do you see the same price action setups that you see on higher timeframes… but you see a lot more of them.
As a result, even with smaller per trade returns, your account growth is staggering because of compounding. I talk more about this concept in the TRTTM lesson.
In sum, the fractal nature of markets helps traders by reducing the size of stops and providing short term traders with more opportunities than their higher timeframe trading brethren.
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P.S. The timeframe charts are of the German DAX Index. In order from top to bottom the timeframes are the 60 Minute, the Daily and the Weekly. The DAX Daily is below with the time and price scales attached. |
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