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GOALS: TO UNDERSTAND AND BE ABLE TO RECOGNIZE AND TRADE THE INITIATING AND RESPONSIVE FRACTAL PATTERNS; TO UNDERSTAND HOW LEVERAGE EITHER TRADING SIGNALS A TRADE OR CANCELS A POTENTIAL TRADE.
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Commodity traders and system sellers have a knack for taking any new development and applying it to trading. Most of the time, these developments do not prove to be profitable and become just another passing fad. In the past, markets have gone through various forms of technical indicators that have either died or lapsed into nonuse because they were not profitable.

The early 1980s produced the $3,000 black box systems, RSI, stochastics, sentiment indexes, and so on. Then Trade Station and other program developers made back testing and curve fitting a fun project for new traders. Mechanical systems were the rage—popular but not profitable. Along came Market Profile, which snared thousands of otherwise intelligent traders into losing money. They lost because Market Profile uses parametric statistics based on the assumption that the market is ran­dom. Parametric statistics are not appropriate to examine nonlinear behavior. Astrology keeps raising its head when new computer programs are sold and then dying back from nonuse. Finding that nothing new seems to work, many traders become attracted to something very old called Candlesticks. Unfortunately, the average trader does not make profits using it.

Chaos and fractals offer a very different outlook. All other approaches are based on traditional Aristotelian philosophy. Chaos and the markets are both "natural" phenomena. Once you thoroughly understand the markets and how they work, you will understand why all the linear systems either don't work from the beginning or die an early death.

For the past dozen or so years, the Profitunity Trading Group has been conducting intensive research into the theory of chaos and quantum mechanics as applied to trading the markets. With the aid of two PhDs in theoretical math and computer science, and using a mainframe computer, we were able to pinpoint the underlying structure (fractal) of the Elliott wave. We used sophisticated nonlinear feedback calculus programs to extract the exact fractal points in the chart. Next, we sifted through thousands of charts on which the fractals had been located via computer, to see whether there were any consistent pattern formations at the fractals.

We found a pattern that accurately reflects over 98 percent of the fractals found by the computer. This pattern recognition allows one to trade the fractals without a mainframe computer. We are presently one of very few groups to apply this theory to real-time trading in various markets. Sparing you the theories, concepts, and experiments that led to our discovery of the fractal of the Elliott wave, let's move on to what a fractal looks like and how to trade it.

Market or "behavioral" fractals indicate a significant behavior change. When you decide to exit a losing trade, where you will get out is quite predictable. You will exit a losing trade when the pain of losing one more dollar is more intense than the pain of saying you were wrong in taking the trade. That point is a behavioral fractal. A fractal also occurs when you pick up the phone to tell your broker to place an order. A behavioral fractal occurred whenever you decided to read this book rather than choosing some other activity. A decision to trade is always a behavioral fractal. To trade profitably, we need to recognize the behavioral fractal of masses of traders and understand the impending change in the bias of the market. We can then place orders before or during the early beginnings of a new trend move. We can examine our individual "psychological" fractals on a personal basis, and we can analyze the market's "sociological" fractals from evidence on a bar chart.

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