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http://www.trader2000.com/Elliott Wave Fractals.htm

ELLIOTT WAVE FRACTALS

One of the basic tenets of Elliott Wave theory is that market structure is fractal in character. The
non-scientific
non-scientific explanation
ex planation of this fractal characte
cha racterr is that Elliott
Elliott Wave patte rns that show up on long
term charts
chart s are identical
identica l to, and will
will also show up on short termte rm charts, albeit
a lbeit with
with sometimes more
more
complex structures. This property of fractals
frac tals is called "self-simi
"self-similarity"
larity" or "self-affinity" and it is
what this writer is referring
referring to when he says tha t the market is fractal in character.
chara cter.

The February, 1999 issue of Scientific

Scientific American presents
American presents a cover article by the well-known scientist
scientist Benoit
Benoit
Mandelbrot. In "A Fractal Walk Down Wall Street," Mandelbrot claims to have discovered self-affinity in
markets, i.e., the idea that fluctuations at small scales are no different from those at large scales. Robert
Prechter took Benoit Mandelbrot to task for taking credit for the work RN Elliott did in the 1930s.

COUNTING FRACTALS

Our use of the word fractal, or Elliott Wave fractal, is not a proper use of the property of self-similarity. When
we use the term here we mean a "counting fractal," which is really a description of the relative position of a
bar on a high-low bar chart. This may create confusion but we do not want to hijack 'Elliott Wave Fractal' from
Dr. Bill Williams, the originator of the expression.

Using so called fractals to count Elliott Waves first appeared, to our knowledge, in
"Trading Chaos."
Dr. Bill Williams' book "Trading Chaos." Like many other concepts in Dr. Willams'
books, the f ractal is elegant
elegant in its simplicity.
simplicity. The basic definition
definition of an 'up' f ractal 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
r ange bar can be both an 'up'
'up' fract al and a 'down'
fractal at the same time.

FRACTAL WA
WAVE COUNTI
COU NTING
NG IS
IS A
BREAKTHROUGH

Using fractals t o count

count Elliott Waves is a breakt hrough
hrough because
because any particular bar either is a f ractal or it is not
a fractal.
fr actal. There ar e no half-pregnant
half-pregnant f ractals. You will especially
especially appreciate t his if you have
have ever tr ied
counting waves from a close only line chart.

HOW TO DEAL WITH FUGITIVE FRACTALS

In a perfect world every time frame chart would have unambiguous sequences of up and down fractals to
mark every Elliott Wave. Unfortunately
Unfortunately,, that's not t he case. Quite oft en 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 

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in time frames, or use a close only chart t o resolve the relative importance of t he fugitive fractal and whether 
or not it should be "forced" into the wave count.

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

FRACTALS ARE BEST COMBINED WITH THE ELLIOTT OSCILLATOR 

Counting fractals can be combined with the Elliott Wave Oscillator to get as close to unambiguous wave
counts as Elliott Wave theory allows. Here's an example of fractal counting . And yes, you would lose the
debate with Robert Prechter on the purity of M omentum Waves as an integral part of Elliott Wave theory.

The 5 bar formation works best on Daily or longer time frame charts. For intraday data charts we often use 9
bar, 13 bar and 21 bar formations for fractal counting.

The Investor/RT Fractal indicator is based upon the "Bill Williams Fractal" in the book
"Trading Chaos" by Bill Williams, PhD. A fractal is an entry technique that is traditionally
defined as "a bar that has two preceding and two following bars with lower highs (or 

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lower lows, on a down move)". Several different varieties of up and down bar 5-bar 
fractal formations can be seen below.

THE ELLIOTT OSCILLATOR 

The Elliott Oscillator, or 5/34 Oscillator, is a 34 period simple moving average of prices subtracted
from a 5 period simple moving average of prices displayed as a histogram above and below a zero
line. You can duplicate the Elliott Oscillator on charting programs with a MACD feature. It can be
applied to any time frame (intraday, daily, etc.) and works equally as well in every time frame
 provided that the correct number of bars are displayed in the chart. The chart below is a good
example of how effective this technique can be in counting Momentum Waves.

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Whether or not Momentum Waves could be considered as true Elliott Waves is not important. We
 just accept that they are not and use them for what they are very good at doing, identifying the
current state and the probable termination point of a swing. The most important single concept
about the Elliott Oscillator is that the highest/lowest point of the Oscillator is connecte d to the
 bullish/bearish Wave 3 of the swing. Related concepts are that Wave 4 crosses the zero line in the
opposite direction of the trend. Wave 5 often makes a new high or low price for the swing but
always diverges from the Oscillator. If the suspected Wave 5 makes a new extreme price
simultaneously with a new Oscillator extreme the n it is not a Wave 5. This happens fairly often with
intraday charts. What you're seeing in that situation is an exte nded Third Wave which carries the
implication of a significant price move in the direction of the trend yet to come.

OPERATIVE TIME FRAME CHARTS

The Elliott Oscillator is most effective when the chart has the "correct" number of bars. From 100
to 150 bars is the correct number of bars to use with the oscillator. Dr. Bill Williams suggests
100-140. Tom Joseph implies that 150 is right. We like to use about 120 bars, which is comfortably
in the middle of that range, and which has consistently produced reliable results.

There is nothing magic about 120 days, 120 hours or 120 minutes. Although an Operative Time
Frame Chart could coincidentally be any of these time periods, constructing this chart has nothing
to do with fixed time periods. Put simply, an Operative Time Frame Chart is a bar chart that starts at
a significant pivot point and displays 120 bars of the swing that started at that particular pivot point.
If analyzing small time frames, like on our Hourly Charts, an Operative Time Frame chart will

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display about 120 bars of anywhere from 15 to 240 minutes of intraday data. The time period of the
 bars in the chart is arranged to always show the swing as an event consisting of about 120 bars. The
sample SPX chart comprises 85 minute bars. This more recent Eurodollar chart comprises two day
 bars. The completed five wave sequenc e would be invalidated by any move below the suspected
5th wave 1.17 low.

WHAT CAN YOU DO WITH AN OPERATIVE TIME

FRAME CHART?

Closely determine the probable time period of the end of a correction.

 Avoid losses by reversing too early on a swing that looks complete.
Closely determine the likely termination of a swing of any degree.
Decide in one second whether you should be long or short.

 Not bad credentials for a simple tool.

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