FRACTAL GEOMETRY

Copyright © 2004 as Inspire Trading System, Copyright © 2020 as Trading System

TRADE SET-UPS I LOOK FOR

Fractal Definition

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.

The system I’ve put together breaks the stock market data down in to fractal geometry and displays it as
a graph. It does not predict future events, it merely is used as a measuring tool for looking over
historical highs and lows and time. This allows the user to find possible repeating support and
resistance points that are otherwise difficult to identify. It simplifies the process of trying to determine
if a stock is “too high” or “too low”. It also simplifies if a stock is long or short. You can look at a graph
and determine immediately that the stock is overbought or oversold.

It also has the capability to determine buy and sell points for finding spots to enter or exit. There is also
the capability for it to quantify the probable percent of a stock having a high or lower close for any
subsequent trading day.

As far as I am aware this is the only fractal system out there. I first designed this particular system in
2004 for myself and have used it ever since.

All 5 of these strategies are for swing trading daily. The fractal geometry is an algorithm that determines
prior support and resistance levels throughout the data set. It then quantifies this support and
resistance and displays it visually in a graph. It allows the user to zoom in or zoom out by adjusting the
time frame. Adjusting the time frame increases or decreases the amount of time the trade is expected
to last. Typical values are daily/7, daily/20, daily/100, daily/200.

The concept is to track prior trades in the data set and to find optimum buy and sell points prior to the
rest of the market. This allows a position to be taken with the possibility of the price expanding
favorably in the direction of the position.

This is comprised of:

 Entry – when to get in to the trade

 Stop Loss – if the trade isn’t working where to exit
 Potential Targets – how high or low to expect the stock to move in the wave
  Time Frame – the number of candles required for the trade

The six trade types I focus on are:

 Counter-Trend Reversals
 Break-Outs
 Pivot Line Cross-Over
 Support-Resistance
 Bounce Of Support or Resistance
 Monster Rally
 Bullish Compression
 Close-Open Trade or Close-Close Trade (predicting next day action)

First is nomenclature to have a handle on the terminology. There are components in the graph that
suggest the future of price action – suggests how the price action will unfold based on herd mentality.
The idea of the fractal geometry is to track the herd of traders buying / selling. Attempting to quantify
and visually display resistance and support to determine set-ups. With a moving vector (purple line)
that is based on past resistance and support of the trading herd. This vector gets projected in to the
graph with the candles as a tape measure that helps provide an idea of how well the underlying rally or
break-down is performing.

Interestingly enough the fractal geometry shows price movements that are not classically visible with a
linear graph that is commonly used to display price over time. With the fractal geometry it will show
how high and low prices are getting relative to the past history. This visibility makes it easier to
determine if the price is going up or going down so it’s less ambiguous. On a linear graph typically
moving averages are used to determine price action. The fractal geometry does not work the same way
as a linear graph. The price action is projected around the pivot line which is in the middle of the graph.
Price is either projected above or below the pivot line or through the pivot line. For me this makes it
easier to look at a graph and see that the price is in either bullish territory or bearish territory.

Autonomy of the Graph

There are the following pieces of information in the graph:
Wave

I consider a wave price movement that moves either above or below the pivot line and then
returns back to the pivot line.

Sample of a Wave

There are long waves “up waves” and short waves “down waves”. This illustrates that the wave
cycles are always moving around the pivot line. At some point the wave will come back around
to the pivot line. It might not cross the pivot line but, it will come back to the pivot line. So the
trick is when it gets back to the pivot/crosses the pivot line high how or how low will the stock
go and for how long. For this I defer to the “resistance marks”, “support marks”, and the purple
vector line. They are not perfect but, they help serve as a guide based on the trading herd’s
behavior.
Pivot Line

When price moves up through the pivot line the expectation is that future price will be bullish
and potentially continue to increase. Conversely when price moves down through the pivot line
the expectation is that future price will be bearish and potentially continue to decrease. When
the price does cross-over up or down I then defer to the resistance marks/vector line (purple
line) to determine how well it’s performing.

Resistance Marks

This marks the top of the prior wave(s). Note the current wave is not marked. The current wave
will only be marked when it has finished and returned back to the pivot line. The marks only
represent prior waves that have now been carved in stone. This is how high traders have taken
price in the past above the pivot line prior to it pulling back underneath the pivot line. The more
black marks are congested the more times the price has failed to move any higher at that
percentage move.

When looking at trades one technique is to look for areas of congestion with the idea that
trades will tend to be repetitive. So prior congestion areas are possibly more likely to hold as
resistance and serve as targets.

Support Marks

This marks the support of the prior wave(s). Note the current wave is not marked. The current
wave will only be marked when it has finished and returned back to the pivot line. The marks
only represent prior waves that have now been carved in stone. Like the resistance marks the
more congested the support marks the more times the price fails to get any lower in that wave.

Purple Vector Line

This line is tracking prior support and resistance areas. When price action gets below this line
buyers are drying up. When the price is above this line there are more buyers than sellers so the
demand of the stock has increased. There are times price will closely hug this line. This line is
 constructed of a calculus routine that looks back on trader behavior and is not made up of any
type of moving average.

Bullish Percentage

This is the percentage change above the pivot line applied across the entire graph. As traders
take each wave above the pivot line, the percentage change is reflecting how far they are taking
the price action above the pivot line at that prior date. This allows a person to look across the
graph and see in the past how many percentage points each wave has moved. This is used as a
tape measure to see how the current wave is moving compared to past waves.

Bearish Percentage

This is the percentage change below the pivot line applied across the entire graph. Like the
bullish percentage, as traders take each wave below the pivot line, the percentage change is
reflecting how far they are taking the price action below the pivot line at that prior date. This
also allows a person to look across the graph and see in the past how many percentage points
each wave has moved. Like bullish percentage, this is used as a tape measure to see how the
current wave is moving compared to past waves.

Bullish Price / Bullish Point Gain

This price data is only applied to the current wave unfolding or has already unfolded above the
pivot line and is not applied all the way across the graph. It is determined from the pivot line.

Bearish Price / Bearish Point Gain

This price data is only applied to the current wave unfolding or has already unfolded below the
pivot line and is not applied all the way across the graph. It is determined from the pivot line.

Macro Trend

This macro trend aka “momentum indicator” helps identify moves that can potentially be more
substantial. For example taking a long trade with a macro trend that is green. Same goes for
the short side taking a short trade with a red momentum aka red macro trend.
 Take a short trade with red macro trend “short momentum” and taking a long trade with green
macro trend “long momentum”

Taking a long trade with red macro trend “short momentum”

When taking a trade trying to align the macro trend “momentum” with the trade direction helps
immensely with the results. This is an example of trying to take the pivot line cross-over as the candles
got through the pivot line, with a failed green momentum which then switched in to a continuous short
momentum.
Counter-Trend Reversals
This set-up is to catch a wider movement of stock price action. The concept is to catch more percentage
of the move in a swing trade either long or short.

Best Counter-Trend Reversal

Above example is the most simplistic counter-trend reversal and the best. The candle moves up through
the purple vector and closes above the purple vector with a nice green candle which becomes a
“reversal-signal”. Next candle is now above the pivot line back in bullish territory. Moving forward, the
expectation is for the price to continue moving up until at some point in the future it finally closes
underneath the purple vector.

Lazy Counter-Trend Reversal

Above is an example of a lazy counter-trend reversal. The counter-trend reversal signal occurs. Then
over the next (n) candles there is no follow through to the long-side. The price action grinds sideways
with the purple vector providing support. After about 6 candles it finally gets above the pivot line. So it
takes extra time for the reversal signal to finally kick-in propelling the price above the pivot line back in
to bullish territory.

Failed First Attempt Counter-Trend Reversal

This example shows a head-fake a.k.a. a failed counter-trend reversal. There was a break of resistance
by the candle getting about the purple vector. However, the subsequent candles continue moving lower
until they got underneath the purple vector. Finally several candles later there was a successful
counter-trend reversal signal. The green candle went through the purple vector and successfully closed
above the purple vector. Then the expectation was achieved as the candles continued to rally. In this
scenario as the candles get back under the purple vector line you can either stop out and take a small
loss –or- continue to hold and hope that the price doesn’t continue to fall in the future. I use the purple
vector as a support line as the candles get back underneath I will look to stop out. The other technique
is to place a hard stop at the low point prior to receiving the counter-trend reversal signal.

Failed First Attempt Counter-Trend Reversal With Stop-Loss

When placing a stop loss under the low point it can cause some heat with the market makers triggering
stop losses by briefly taking the price underneath the nearest low for a brief amount of time only to
have a green candle signaling a counter-trend reversal a few candles later. So I’ll tend to read the
purple vector and watch the candles getting down through it and stop out in that scenario and then
get back in on the next signal. When I take a counter-trend reversal I keep in mind it could take two
attempts at catching a successful counter-trend reversal. So I’m watching those subsequent candles for
the price to stay at or above the purple vector keeping in mind it could be just a “Lazy Counter-Trend
Reversal” where price might just briefly get underneath only to find that the signal is rock-solid and the
price ends up over the pivot line.

Break-Outs
This is the most exciting pattern as it’s a continuation pattern, long or short and can lead to massive
gains that are outside of an expected move.

Illustration of a Break-Out

The price leaves the congested bands of resistance and explodes upwards with good momentum. The
congested band of resistance is highlighted with the yellow. Once the candles leave this band they have
the opportunity to significantly move higher as they are outside the normal range of resistance. At this
point traders do not have any prior reference of where to sell or short the stock (unless there has been
a prior break-out). It has limited resistance points so the price continues to move higher until it hits
exhaustion. The exhaustion occurs when traders run out of money and/or the stock is so overvalued
that there are no more buyers. The sky is the limit as stocks sometimes break-out and go up 100%,
300%, 1000%, or 12000% so I’ve found now way to pre-calculate what that upside might be. On the
graph you can see once that first break-out occurs to the far most left, the other two break-outs tend to
follow with a similar top (double top). With that first break-out in place there is now a “stake-in-the-
sand” as to how high the break-out got prior to a pullback. This gets marked on the far right as a
resistance point by the little black line next to the percentage value. Note, IT ONLY GETS MARKED
when the price action (candle) gets back underneath the pivot line, until it gets back underneath the
pivot line no mark is placed in the graph as the price action could still be expanding.

Pivot Line Cross-Over

 Illustration of a pivot line cross-over

Expectation on a pivot line cross-over is the price action continuing to rally on the next candle(s) giving
confidence to continue with the trade long. So the ideal situation above is in target (tgt). The green
candle straddles the pivot line with the close price being above the pivot line. The arrow is pointing to
the candle that straddled the pivot line closing above it. Now the objective of the subsequent candle(s)
on the next trading session is to close higher than the candle pointed to with the arrow creating a rally
lasting over many candles. In short, the candle straddles pivot line closing above it, I expect the next
candles to continue with this action, if not I stop loss on the trade.

Not a pivot line cross-over

Looking at the arrow this is not a valid pivot line cross-over as the price is coming down from a bullish
wave sequence. For it to be a qualified, pivot line cross-over the price must have started from
underneath the pivot line and then go up through the pivot line. When I see this set-up I completely
ignore it.

Support-Resistance
Bounce of Support or Resistance

Monster Rally - Identifying a Potential Monster Rally

Below is a fractal graph of tsla. The fractal graphs make it much easier to identify rallies versus run of
the mill extensions that tend to have limited upside. The big rallies “monster rallies” are identified on
two time frames that I tend to use: daily/100 or the daily/200. These two times frames take large
samples as the 100 and 200 imply. By taking a “large sample” it tends to marginalize the smaller waves
putting them on a similar level. That way when the price action gets above all the smaller waves there is
a high probability that a monster rally is underway and in the beginning stages of inception lasting over
many months. The monster tsla rally below started, Nov 19, 2020 and lasted through, Feb 16, 2021. It
has a peak upside move of 119.0%. These peak upside moves can be dramatic as they can get 200%,
400%, even well over 1000%. The trick is to find them sooner than later so you can participate in the
trade from the first few candles. That requires checking at the end of day, every trading day to see if a
monster rally is forming.

Looking at the graph below of tsla, the “yellow band” marks the resistance area that contains the price
action “most of the time”. When the price action gets above that yellow resistance band that signals a
Monster Rally might be in the works. I then take a position and wait and see if it continues to move
higher as it unfolds. If the candles get back under the center pivot line then the rally is considered dead
as the stock is going back in pullback/retracement mode. Look at the example in aapl below, there can
be a bit of consolidation occasionally with a “Monster Rally”.
Using aapl as an example it has Monster Rally after Monster Rally. Notice though had it can leave the
lower yellow band of resistance then occasionally has come back down and tested the center pivot line
to see if it holds and only then does it continue moving forward with the Monster Rally. So that’s the
other twist to identifying a Monster Rally. It can leave the yellow resistance band, turn and test the
break-out at the center pivot line. So that needs to be kept in mind trading them. There can be that
“break-out” of yellow resistance, then a position is taken, to only find it come back and test the center
pivot line only then will it continue with the break-out. So the identifiable risk is “break-out” of
resistance with a stop loss under the center pivot line. In aapl that represents a 17% stop loss.

Here is a zoomed in view of what I’m talking about. The price action leaves the yellow resistance band
only to continue consolidating within that band prior to continuing the “Monster Rally” break-out. So
it’s not a super clean break-out. This is something to keep in mind when trading. Occasionally it’s better
to take a small position then add as the rally continues moving forward versus going all in on the initial
break-out.
Another example in aapl with the “Monster Rally”

See the price action got to the top of resistance then pulled back only to turn and break-out of the
resistance area.

So in essence there are two forms of a break-out in a “Monster Rally”

1) The price action breaks-out of the lower resistance band only to continue moving higher never
looking back.
2) The price action breaks-out of the lower resistance band only to pull back to the center pivot
line and then turn and continue with the Monster Rally.
On both those trade set-ups the stop loss is under the center pivot line.

Bearish Compression

Bullish Compression
This pattern consists of ascending lows, that is lows that are getting higher and higher with the
extension hanging around the center pivot line. Typically with this pattern at the apex of the move the
stock price radically moves higher. I’ve attached edit that just went through a compression pattern.
They are generally fairly easy to spot as they are compressing/coiling up.

Example of a bullish compression/coiling pattern

It’s a series of pullbacks each one more shallow and it’s typically followed by 4 pullbacks as shown
above. The can be found in any time frame, daily or intra-day. Occasionally the price dips under the
support line prior to breaking up through the center pivot line but, typically the trade looks like the one
shown in the example above.

Another example of a Bullish Compression Pattern

Close-Open Trade or Close-To-Close Trade
There is a way to determine the probable direction of the next day’s close. It determines if it will be
higher or lower than today’s close. With that information you can then calculate an approximate
change in that price going in to the next day.