Fractal Finance introduces:
The Chaos Barometer - "One way to predict the future is to create it. The other way is Fractal Finance"
For years, investors have been using the same old indicators to trade the markets, but now there’s Fractal Finance ™. The difference is a non-linear approach to market forecasting. Just think what trading would be like if you made decisions based on what you should do, rather than what your emotions tell you to do. This was our goal when we set out to build Fractal Finance ™. While this may sound like an impossible dream, Fractal Finance ™ was designed with this in mind by incorporating the science of Chaos theory.
The Chaos Barometer is designed to reveal "hidden" market dynamics while providing an original alternative estimate for a range or trending market. These estimates differ from all standard estimates known in technical analysis because they completely rely on calculation principles borrowed from Chaos theory and Fractal geometry.
In physics, every thermodynamic system evolves towards a state of maximum chaos. Markets are no different in this respect. Stable trends are characterized with decreased chaos which rarely lasts very long. Normally, these trends quickly dissipate into undetermined high volatility conditions due to the combined action of market participants. In a liquid, the condition would look like the image below.
Increasing Chaos in a Thermodynamic System
The problem with “standard indicators” is that they assume markets are random. Anyone who has ever traded for any length of time, knows too well that markets do not act randomly. The reason that contemporary indicators break down is that they are using Euclidean or linear geometry to measure dynamic, natural (man-made) systems. Imagine if you tried to measure an ocean wave with a ruler! As a trader or investor, you are doing the exact same thing when you trade with standard indicators.
The Chaos Barometer selectively measures chaos inherent in momentous price oscillations within a given sliding window of measurement. Chaos Barometer separately attributes a measure of chaos associated with up and down trend movements in relationship to the price. It further monitors the balance between prevailing chaos in either an up or down trending state.
In conclusion, this package is a perfect complement for fundamental and technical traders that analyze a number of markets and strategies. Ultimately, the purpose of the Chaos Barometer is to easily improve entry and exit positions. We feel it does this well.
The Chaos Barometer includes:
Chaos Barometer Trend - An indicator that displays the strength of the upper and lower trend.
Chaos Barometer Excess – Indicates the strongest trend and quantifies it with a number.
Chaos Barometer Signal – A built-in strategy that plots buy and sell signals based on simple inputs. Use the Signal strategy for trading or as a template for your own custom strategies.
Chaos Barometer can be used standalone, with other indicators, or to build systems. All of the functions are accessible and allow you to build any custom trading system or indicator.
The best part is that these tools can be obtained right here. Chaos Barometer contains everything you need to meet the market as you should, head-on. For this reason, Chaos Barometer can improve both your trading and your life. Get the Chaos Barometer today! Chaos Barometer is available for the MultiCharts and NinjaTrader trading platforms.
Trading with the Chaos Barometer:
Trading with Chaos Barometer is remarkably simple. Add the indicator named “Chaos Barometer Trend” to your chart.
You will see the oscillator fluctuating in a range between zero and one. The closer to zero the barometer is, the stronger the trend is.
The direction of a prevailing trend is indicated by the color. Red indicates a prevailing down trend, while green suggests a prevailing up trend.
Normally, indicators for both price directions appear combined into one cumulative indicator showing the prevailing trend only. However, you can choose to display them both alongside each other to compare the intensity of uptrend against the downtrend. This option is at the user’s discretion.
The appearance can alternate between a single oscillator and a double oscillator by selecting the “ShowLead” setting, which is set to “True” by default. If you change this setting to “False”, both trend oscillators will show up. Below you can see the same symbol and time frame as above but with two trends shown individually.
Distinction of trends is prominently displayed through the “Chaos Barometer Excess” indicator, and is calculated as the difference between the two trend oscillators comprising the “Chaos Barometer Trend”. You can add this indicator to your price chart instead of “Chaos Barometer Trend” allowing you to watch the pure excess dynamics.
Below the “Chaos Barometer Excess” is plotted alongside the “Chaos Barometer Trend” for a visual comparison.
When “Chaos Barometer Excess” is greater than zero, it indicates an uptrend. Values less than zero suggest a down trend. The bigger the deviation is, the stronger the trend evidence is. To facilitate this visual interpretation the indicator is accompanied with a zero line. An additional “Threshold” parameter plots constant level lines indciating a trigger condition. When “Chaos Barometer Excess” exceeds the trigger level, a trade signal emits. The level can be selected and optimized per time frame and security using strategy backtesting and optimization.
The Chaos Barometer package includes a ready trading strategy based on the above principles. When the barometer is in the green zone, a long position is triggered for an upcoming uptrend. When it finds itself in a red zone, an exit signal is cast and optionally a short position is triggered for an upcoming down trend.
We have tested a hypothetical historical performance of such a strategy and as you can see, received positive results as depicted below.
Results will vary from market to market and largely depend on the size of the sliding window used in chaos estimations. It is worth exploring optimization of the strategy under various periodicities and windows sizes.
In our backtests, the optimized strategy shows profit factors above 2 on most of the markets and time frames we have tested.
Additional extensions of the strategy may include a delay in entering the trade to ensure that the trend stays stable for one or more bars. This would be at the user’s discretion. In real trading, this simple strategic approach can be complemented with proper money management techniques for stop loss and profit taking conditions. This should offer even greater performance outcomes.
In summary, the Chaos Barometer is a completely unique, sensitive trading instrument. When used properly with money management rules, it is sure to help your trading. Chaos Barometer is only available from Quant Trade and Fractal Finance.