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1. Introduction to Equilibrium Fractal Wave for Financial Trading
The concept of Equilibrium fractal wave was first introduced in the Book: Financial Trading with Five Regularities of Nature: Scientific Guide to Price Action and Pattern Trading (2017). In the book, I have categorized the three distinctive market behaviours (regularities) for financial trading (see appendix). The second behaviour was further split into the three sub categories. Therefore, the five distinctive market behaviours were introduced for financial trading in total (see appendix). Most of trading strategies can be categorized under these five categories except the correlation (i.e. fundamentals). Having said that, the correlation is still the main cause behind these five distinctive market behaviours. Therefore, we are still studying the effect of correlation while we are studying these five distinctive market behaviours. If the five categories sound too much, forget about it. I always like things simple and stupid. Just remember the three categories for your trading. The three categories include equilibrium (first), equilibrium wave (second), and equilibrium fractal wave (third). In brief, equilibrium is equivalent to the trend. Equilibrium wave is equivalent to the market cycle with some definable cycle period. Equilibrium fractal wave is equivalent to the infinitely repeating price patterns in the financial market.
Many people might feel curious to see equilibrium wave and equilibrium fractal wave instead just wave and fractal wave. They or you might question why “equilibrium“ in front of “wave” and “fractal wave”? In fact, this is due to my personal understanding on particle-wave duality from Quantum Physics. Equilibrium is in fact a term to represent the particle or the behaviour of the particle in the financial market. Many scientist believe that they can not apply the quantum physics directly to the financial market. Indeed, what I believe is that we can use the Quantum physics but we just need a modified version of Quantum physics to better model the financial market due to the strong presence of Equilibrium fractal wave. Only discuss this to show you how the five categories (i.e. the five regularities) are inter-related to other branches of science. The focus in this article is to explain equilibrium fractal wave as simple as possible without any mathematical equation if possible.
Anyway, the way we capture each of these three market behaviours into our profit is very different because their distinctive characteristics. There are two cases where many traders make a serious mistake for their financial trading. Firstly, many traders often believe that the second and third categories are strongly similar in terms of how to capture them technically, because both have the term “wave” inside. Secondly, many others also believe that they should only capture the first category of the market behaviour ignoring the second and third category. First case is due to the lack of technical knowledge. If you are trying to define the cycles where the cycle period is not definable, then your model will start to break down. We cannot torture data to see what we want. If you can define the periodic cycles, yes, it is great opportunity for our trading. Go ahead with it. However, if the equilibrium fractal wave is present strongly, then due to its infinite scalability, modelling the market with periodic cycle become very difficult task. The second case is due to the overly simplified belief on the financial market. Just imagine that financial market is the transformation of infinite number of internal and external variables into the two dimensional space between price and time. Therefore, the price represents the complex crowd behaviour. In highly liquid and competitive financial market, an overly simplified assumption can offer you the immature entry and exit only for your trading.
To avoid the above two cases, it is helpful to understand the three distinctive behaviours of the financial market in details. Indeed the main book: Financial Trading with Five Regularities of Nature: Scientific Guide to Price Action and Pattern Trading (2017) will provide the good introduction over all three distinctive behaviours of the financial market. In this introductory book, we will only cover the basics of the Equilibrium fractal wave for your trading.