Do you know what a “fractal structure” is?
By knowing the fractal structure, you will be able to understand “multi-time frame analysis,” which analyzes FX charts over multiple time frames, much better than before.
In this issue, we provide an easy-to-understand explanation of the “fractal structure,” which is the key to multi-time frame analysis.
What is a “fractal structure?”
A fractal structure is, simply put, “a structure in which even the smallest part of the whole has the same shape as the whole,” and is called self-similarity.
Some well-known examples are “snowflake,” “coastline,” and “broccoli.
If you zoom in on the tip of a snowflake, you can see that there is a cluster of small crystals there that have the same shape as the entire crystal.
In addition, the “Rias coastline,” including the Sanriku coast of Iwate Prefecture in Japan, appears to have the same convoluted shape in both satellite images and the view from high ground.
Even if one zooms in on one part of the coastline, the same structure as the entire coastline appears again.
This is called a “fractal structure.
As explained in the figure below, in the fractal structure of a triangle, no matter which part of the triangle is zoomed in, the same structure as the whole appears there.
In theory, “one part can be enlarged, and then another part can be enlarged and repeated indefinitely at ……”, and there “the same structure as the whole” will appear endlessly.
Forex charts are also fractal structures
In fact, FX charts also have this “fractal structure.
Once you understand this, you will be able to understand “multi-time frame analysis using multiple time frames,” which seemed complicated, with a clear image.
First, let’s look at the daily chart
First, let’s look at a very ordinary daily chart.
*Click to enlarge.
Since this is a simple candlestick-only chart with no technical indicators at all, you can clearly see the state of the trend and chart patterns such as double tops.
Please refer to the article below for more details on double tops.
A daily chart is a chart that shows the daily price movements in a single candlestick.
In other words, one candlestick is filled with the trades made by market participants during the day.
This means that if you zoom in on a single candlestick, you can see the trades that took place during the day in detail.
What does “magnify a single candlestick” mean?
By the way, what does it mean to “magnify (zoom in) a single candlestick”?
It can be paraphrased as “to divide a single candlestick into smaller pieces.
With only one candlestick, we only know the rate at which the candlestick began, the rate at which it ended (opening and closing prices), and the highest and lowest prices.
With only one candlestick, it is impossible to know how the rate moved up and down within that candlestick.
Therefore, we can reduce the time interval between candlesticks and display a large number of candlesticks.
In other words, “making the time axis of the chart smaller” = “enlarging a part of the chart.
When we zoomed in on a section of the daily chart, the same shape (fractal structure) appeared
So, I zoomed in on a portion of the daily chart and displayed it on the “hourly chart”.
The “orange lines” on the daily and hourly charts both show the same date and time.
Since 24 candlesticks on the hourly chart are equivalent to one daily candle, we can say that the hourly chart is “a chart that magnifies the daily candle by a factor of 24.
What do you think?
The 1-hour chart, which is an enlargement of the daily chart, shows the same chart patterns as the daily chart, such as a trend state and a double top.
When you zoom in on one part of the chart, you can see the same structure as the entire chart – a fractal structure.
Furthermore, when I zoomed in on one part, the same shape (fractal structure) appeared again
Let’s zoom in further (zoom in) on the portion of the hourly chart shown earlier.
Let’s display the candlestick of the same location, this time on a “5-minute chart”.
If 12 5-minute candlesticks are made, it is equivalent to one hourly candle.
Therefore, a 5-minute chart can be said to be “a chart that magnifies an hourly by 12 times,” and furthermore, it is “a chart that magnifies a daily by 288 times (24 times x 12 times = 288 times).
What do you think?
Here, too, we can see the same fractal structure, with trend conditions and double-top patterns.
If we zoom in to the 5-minute time frame, we can see that the same structure as in the overall chart appears.
This is illustrated in the figure below.
If you zoom in on one part of the double top, the same double top appears there, and if you zoom in further, another double top appears.
Incidentally, in this way, the charts of all time frames give the same impression. Therefore, even if someone says of an hourly chart, “This is a daily chart,” you may not immediately notice the difference.
─ ─ As we have seen, through these facts, we can understand that FX charts are fractal structures.
Multi-timeframe analysis uses a fractal structure
If you zoom in on a portion of a large time frame forex chart (i.e., reduce the size of the time frame), you will see the same price movements and chart patterns (i.e., fractal structure).
In other words, the price movements themselves are the same for each time chart, just at a different scale (expansion rate).
The difference is the “length of time” over which the price movement took place.
It takes weeks or months for a double top to form on a daily chart, but on a 5-minute chart, the pattern appears in a few hours.
By taking advantage of the fact that the price movement pattern is the same for all time frames (i.e., fractal structure), it is possible to detect changes in a large time frame on a small time frame earlier, or to anticipate a situation where a trend on a small time frame is about to end.
That a small time leg is part of a larger time leg
Once you understand that FX charts have a “fractal structure”-that is, “a small time frame is a part of a larger time frame”-multi-time frame analysis using multiple time frames becomes instantly familiar.
For example, let us assume that the 4-hour chart is in an uptrend.
If we zoom in on the tip of the uptrend on the 15-minute chart, we see that a head-and-shoulders pattern has formed.
In the long term, the uptrend may still continue, but in the short term, we can conclude that the upward movement is likely to pause.
Therefore, we may close out the buy position, or we may actively sell day trading or scalping from here to the 4-hour chart point.
In this way, multi-time frame analysis uses the characteristics of fractal structure to analyze “current small movements within a larger trend” and to determine “the impact of current small movements on the larger trend.
Multi-time frame analysis is explained in detail in the article below, introducing specific trading methods.
Elliott Wave Theory also has a fractal structure
When learning about forex trading, the Elliott Wave Theory is something that always comes up.
Elliott Wave Theory is a chart analysis theory developed by the American stock analyst Ralph Nelson Elliott (1871-1948).
The basic concept is that “rate movements are waves,” which are classified into five upward waves and three downward waves, and that these waves repeat themselves in the course of the market flow.
Elliott waves can also be viewed as a fractal structure and, like multi-timeframe analysis, can be used as a weapon in the formulation of forex trading strategies.
For example, if a double bottom is formed on a large time leg and then the price is rising through the neckline, the large time leg is considered to be in the “rising third wave of Elliott waves.
Therefore, it would be effective to enter the market at the point where the price reverses and rises after an adjustment in the smaller time frame, i.e., at the point where the price enters the same “Elliott Wave 3,” and then hold the price as long as possible (i.e., postpone profit-taking).
This means that the third wave of the Elliott Wave is viewed from the perspective of the fractal structure, and trades are made in the “small third wave” of the Elliott Wave.
Thus, if we apply the concept of fractal structure, it will be easier to capture advantageous price movements in FX.
What is “Fractal Structure”? ~ Summary of Multi-Hourly Charts
A fractal structure is “a structure in which one part represents the whole.
A fractal structure is characterized by the fact that when one zooms in on a part of the fractal structure, the same structure as the whole appears again.
Forex charts also have a fractal structure, so small time frames are a part of a larger time frame and show similar price movements.
Multi-time frame analysis, which uses multiple time frames, uses this fractal structure to analyze “current small movements within a larger trend” and to determine “the impact of current small movements on the larger trend.
The above is the explanation of “Fractal Structure” and how to use multi-time frame charting in Forex.
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