# What are Fractals?

### Video Transcription:

Hello traders. Welcome to the Price Action Course and the fourth module market fractals. In this lesson, we’re going to learn what market fractals are and why it is so important for us to understand the cycles in the market and how to calculate them.

Let’s start by defining what market fractals are. Markets move in cycles and these cycles show patterns that tend to repeat themselves. Cycles repeat and the patterns inside these cycles also repeat over and over, in time.

A cycle is a measurable phenomenon that occurs consistently in frequent time intervals. These cycles can be measured in points and length. This means that, not only we can measure a cycle in pips or points but also in time. Meaning that, we can also measure how long did it take to complete. This is very important because by knowing in which cycle we are, we can, not only, be more accurate when choosing the side of the trade but also when forecasting direction. You’re going to see when we go to the charts that by understanding fractals and by analyzing these patterns in the past, we are going to understand the future direction in price. Our trading decision are based on pure price action. Cycle analysis is going to be a very important tool when trading.

I think that the best way for you to understand what I’m talking about is to go to the charts and to show you how to locate these patterns and how to calculate the length and time of them and how to forecast price action with them.

Okay traders, this is the US Dollar/Japanese Yen daily chart and we’re going to start at July 2007 because we are analyzing the overall structure of this market. Now, you can see that we have a very strong move to the downside and then a break of this structure on a deep correction. We’re going to calculate the first move, from this high to this low. This is about, 2700 pips. The corrective move is about 1350 pips, which is a little bit less of a 50% correction of the move to the downside.

Then, we have a serious dip to the downside, which we are also going to calculate. This is a 2300 pip move and it took 86 bars from this high to this low. Meaning that, it took 86 days to go from this high to this low. And from this high to this low, it took 187 days and the corrective move lasted 110 days.

Now this corrective move, we are also going to calculate it. And it lasted 52 days and it was a corrective move of 1,400 pips, which is more than 50% retracement. This is important because you can see that the corrective moves are deeper and are taking less time. The actual move to the downside is loosing it’s strength because we went from a 2700 pip move to a 2300 pip move. Now, we continue to the downside in a very slow matter. If we calculate the move from this high to this low right here, which is a very nice base actually. It’s about 2500 pips and it took more than one year to go from this high to this low.

The first thing you need to notice is that we were in a very strong move to the downside. A deep correction and another move to the downside. The second wave of this cycle was tinier, or was less deep than the first one. In percentage, the second correction, or the second corrective move was much stronger than the first corrective move. This can mean that because the corrections are getting stronger and deeper, we are about to finish with this cycle.

The fifth wave of this cycle took over a year and we made it to this low, to the 75 area, for about 2500 pips. This is the first thing we’re going to the do. The second we’re going to do, of course, we’re going to draw our levels this high. And then another level, this high. And a third horizontal line at the bottom, right here.

Now, this is what’s important about calculating moves and knowing about cycles. If we’re in a down cycle, we are going to understand that a corrective move to the previous lows is going to take us on a fifth wave to approximately the same length of the previous wave to the downside. When we get to this low and price moves up again, and move again right here, we know that this wave has not yet finished and that we need to hold our position. Of course, we’re talking about a very long term position right here, but the analysis can be done in the hourly and, of course, in the four-hour charts. I’m just taking the daily chart on the US Dollar/Japanese Yen because it’s very clean and you are going to understand what I’m talking about.

We have our first corrective move right here and of course we have what seems to be a boxed price action right here. This is a fractal. This box is a fractal. You can see that we also have another boxed price action right here. When we look at this, you can see that by just calculating from this high to this low, it’s 1639 pips. And the box from this low to this high is about 520 pips and it took 210 days.

When we start chopping right here, we are going to just grab a ruler and calculate the length that should probably take this box to break to the downside. And you can see that this box was 400 pip box and it took 192 days. So approximately the same fractal before to move to the downside. If you want to calculate the approximate target, you go from the low of the box to the low of the next box, it’s 700 pips. If you go from here to here you have 700 pips. Of course the targets here were not hit and price moved to the upside. It’s not an exact science but you can actually calculate the achievable targets in future price action just by noticing this boxed price action in the middle of a move.

If we continue to the upside, you can see that this move was very strong. We bounce off these lows around the 75 levels, which was not touched. Actually, the 75 level were our targets at the breakout of this box but the price didn’t touch the 75 level and continued to the upside. Now, we’re going to start analyzing price action from this low right here. We have a very strong move to the upside of about 2500 pips, which means that this move to the upside, is in symmetry of this move to the downside. When we achieve this level, we can expect a correction.

You can see that we do have a correction from this high to this low of about 1000 pips. Price, it was boxed in. This is what’s very interesting about this type of analysis is that even though price continued to the upside, it was still trapped inside the box of the corrective move. Taking long positions inside this box was not a very good idea. We needed a break above these highs, the previous highs, right here. Which, in this case, we did break but you can see that it was a fake up because we moved strongly back to the downside. Right here, we closed above it but then moved, on the next candle, below it.

This is what a fractal looks like. Of course, you could also draw a trend line from these highs to see if we are going to be counter trend or if we are going to be moving lower. In this case, we are only focusing on fractals. We need a break above this boxed area. When we break to the upside, our calculated targets in symmetry of the previous move should be around the same length. In this case, we touched the 120 level. From the break of the box to this high, we have moved 1800 pips. And we have done it in 72 bars. Remember that this move to the upside only took 19 bars. And this box area took 168 bars. If we are talking about symmetry here, we can expect targets to be around the 130 level. If we achieve the 130 level, it will be a 2400 pip move.

If you look closely right here… I’m going to use the same rectangle to show you how this might play out. Okay? We have a strong move to the upside. And then, we have a corrected move, a lower low, and then a higher low. If you look at how price is rated right now, from this high to this low, we are also making a lower high and a higher low. We are trading in the same way that we traded inside this box. And then, price continued to make what seems to be a triangle formation.

You also need to use what you know about patterns in the market because you can see that we are trending in a triangle formation, which we are right now. Let me just put on the line so you can see better what I’m talking about. And then after the breakout of the triangle, we traded inside this box. Okay? The move to the upside from the breakout of the triangle to the high of the move — let me just grab another ruler — was about a 674-pip move that lasted 33 bars. When we break to the offside, we can look for a move of about the same length which will mean that just by using a trend line from the breakout to this high and expose it right here, we should be looking around a move to the 125-44 area. Afterwards, we can expect a consolidation period right around these zones before a break higher.

Now, of course, this is just what forecasting with previous structure in the market looks like. You have to wait for the confirmation of this breakout to be able to take a position and calculate your targets. Okay? Of course, you can also use previous levels on the daily and key ratios to put everything you have learned in motion. This is what looking for market fractals looks like.