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THE INITIATING FRACTAL PATTERN
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A fractal pattern on a bar chart (of any time span) consists of a minimum of five consecutive bars. Our working definition of this initiating fractal is that the middle bar must have a higher high (or lower low) than the two preceding bars and the two following bars. It may look like any of the examples in Figure 8-1. It is important to note the following restrictions:

1. If a bar's high is parallel to the middle or high (low) bar, it does not count as one of the five bars in the fractal because it does not have a lower high (higher low) than the middle bar;

2. Two adjacent fractals may share bars.

In Figure 8-1, notice that pattern A shows a pristine fractal where the two preceding and the two following bars have lower highs than the middle bar. This sets up an up fractal, designated by (a). Pattern B is also an up fractal, but the same formation also creates a down fractal (v). This happens because the two preceding bars and the two following bars are "inside" bars. They fulfill the requirement that the middle bar must be the highest or lowest of the minimum five-bar sequence. Pattern C shows another formation that creates both an up fractal and a down fractal. As shown, these fractals may "share" bars. Pattern D requires six bars to form an up fractal because the fifth bar has a high equal to the previous high. Remember the working definition:

A fractal must have two preceding and two following bars with lower highs (higher lows, on a down move).

In an up fractal, we are interested only in the bar's high. In a down fractal, we are interested only in the bar's low.

When the market is making a bullish upward move, puts in a top, and then starts back down with two bars that have lower highs, that market has made a fractal decision. (See Figure 8-2.) It has gone up to point A and, for whatever reasons, has turned back down. Should the market again move up and then go beyond (higher) the price at point A, the pattern indicates that the market has changed its mind and decided to recant its earlier decision to stop at point A. One tick above point A then becomes a breakout buy.

Any five-bar sequence in which the middle bar is higher (or lower) than the two preceding and two following bars forms a fractal, and once a fractal is formed it will remain a fractal. During the lifetime of this fractal, it may play several roles. It can, from time to time, be a fractal start, a fractal signal, or a fracal stop. The role it currently is playing depends on where it is located in the sequence of the market's up-and-down movement.

Definitions

Before going further, we must define these various roles that a fractal can play:

Fractal start is any fractal that is followed by a fractal in the opposite direction (see Figure 8-3).

Leverage

Fractal signal is any fractal that follows a fractal in the opposite direction (see Figure 8-4).

Whenever an up fractal, for example, is followed by a down fractal, what happens in between is always an Elliott wave of one degree or another. Notice that a fractal start and a fractal signal are always generated at the same time.

Fractal stop is the most distant fractal peak of the last two fractals in the opposite direction. Usually, but not always, this will be two fractals back in the opposite direction. Figure 8-5 shows both cases.

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