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Financial Markets: The Fractal Concept Report

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Updated: May 5th, 2022

Introduction

Multiple theories have been developed to eradicate randomness in the financial markets. Therefore, the markets should be studied like any other natural system. Predicting the behavior of the volatile financial market is a challenge because there has been much chaos in the market. A new capital market theory has been developed to inculcate chaos. The traditional, quantitative methods and the fractal concept are adopted to speculate and predict the market trends. A fractal is an irregular and complex trend that is not easily foreseeable into the future (Peters, 1996).

Fractal Market

Fractal market is also referred to as investment horizon theory. This is defined through various hypothetical statements. Some hypothesis statements purport that the market is liquid when there are a large number of investors with different time horizons. It is also important for investors to maintain their time zones irrespective of any information. The available information may not be reflected on the market price on a real time basis. The market trends reflect the changes in expected earnings. However, if the fractal structure is not maintained, the market loses stability (Michael, 1985).

Markets are like a system of energy and money flow. Therefore, the study of the predictability of the market trends is critical. Some scholars have discussed fractal concept as a pattern used in the technical analysis to predict a repeat in the real time market trend (Landini, 2011). However, as a market indicator, the fractal concept is useful when used with other indicators such as moving averages. For the fractal concept to be applicable, the investors should have the real time information. This implies that for the investor to make the required decision current information has to be reflected on the market indices promptly. The market has different time horizons leading to the different class of investors. According to the fractal concept, the market remains stable as long as the difference in time horizon is maintained. In instances of time synchrony, the market loses stability because this implies that all investors are trading at the same time (Brams, et al, 2009).

The fractal market concept enables investors to extrapolate a detailed map of the future price action. Therefore, this facilitates the market players to be aware of most waypoints. The fractal method as a market indicator has five bars that facilitate its application as well as entry and exit points. The fractal pattern has five bars in its application to predict the price movements. For instance, when the lower bar is located in the middle of the trend pattern surrounded by two bars with successively higher lows, a shift from the down-up trend usually occurs. On the other hand, a shift from the up-trend to a down-trend occurs when two bars with successive lows and highs surround the highest bar are located in the middle of the trend (Hohlfeld& Cohen, 1999).

Conclusion

Randomness is a complex index. It clashes with various facts or intuitions. In finance, randomness clashes with economic rationality, sovereignty, or free intuition and clear causality. Financial markets have developed methods to predict future market trends to eradicate randomness and increase investor’s chances of higher returns. The fractal concept is one of numerous market indicators alongside the Fibonacci numbers and the moving averages. The fractal market indicator assists investors in predicting the repeating cycle in economic trends. Although it may sound complicated, experience makes it highly effective.

Reference List

Brams, SJ, et al 2009, “Fractal Geometry, A Brief Introduction to,”Encyclopedia of Complexity and Systems Science, pp. 3700-3720.

Hohlfeld, R & Cohen, N 1999, “Self-similarity and the geometric requirements for frequency independence in Antennae,” Fractals,vol. 7, no.1. pp. 79–84.

Landini, G 2011, “Fractals in microscopy,” Journal of Microscopy, vol. 241, no. 1, pp. 1–8.

Michael, B1985,”Fractals – Geometry Between Dimensions,”New Scientist, vol.105,no. 31, pp.1450.

Peters, E 1996,Chaos and order in the capital markets: a new view of cycles, prices, and market volatility,John Wiley & Sons, New York.

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