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Elliott Wave Theory

Elliott Wave Theory - FRACTALS

One of the basic tenets of Elliott Wave theory is that market structure is fractal in character. The non-scientific explanation is that Elliott Wave patterns that show up on long term charts will also show up on lower time frame charts, albeit with more complex structures. We are not aware of any peer review quality research to support or disprove this hypothesis, but it does appear credible from the empirical evidence of others and from our own experience. This property is called "self-similarity" and it is what a writer is referring to when he says that the market is fractal in nature.

Our use of the word fractal, or Elliott Wave fractal, is not a use of the property of self-similarity. When we use the term we mean a "counting fractal," which is really a description of a particular bar on a high-low bar chart. We do this not to create confusion but to give proper credit to Dr. Bill Williams, the originator of the expression as we use it.

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Using so called fractals to count Elliott Waves first appeared, to our knowledge, in Dr. Bill Williams' book "Trading Chaos." Like many other concepts in Dr. Willams' books, the fractal is elegant in its simplicity. The basic definition of an 'up' fractal is a bar high that is both higher than the two bars immediately preceding it, and higher than the two bars immediately following it. The lows of the bars are not considered in determining the up fractal progression.

If two bars in the progression have equal highs followed by two consecutive bars with lower highs, then a total of six bars rather than the usual five bars will make up the progression. The first high becomes the counting fractal. Reverse for 'down' fractals.

A wide range bar can be both an 'up' fractal and a 'down' fractal at the same time.

Using fractals to count Elliott Waves is a breakthrough because any particular bar either is a fractal or it is not a fractal. There are no half-pregnant fractals. You will especially appreciate this if you have ever tried counting waves from a close only line chart.

In a perfect world every time frame chart would have unambiguous sequences of up and down fractals to mark every Elliott Wave. Unfortunately, that's not the case. Quite often the fractal progression is broken with what we call 'fugitive' fractals, for example, two clearly marked up fractals with no intervening down fractal to unambiguously complete the wave. In these cases you have to use your own judgment and go lower or higher in time frames, or use a close only chart to resolve the relative importance of the fugitive fractal and whether or not it should be "forced" into the wave count.

Fractals mark the beginning and ending points of individual waves. As Dr. Williams put it, "Whatever happens between fractals is an Elliott Wave."

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