# Judging Breakouts

By Buyer, Shera; Sorkin, Jay S. | Modern Trader, March 2000 | Go to article overview

# Judging Breakouts

Buyer, Shera, Sorkin, Jay S., Modern Trader

In today's uncertain global markets, traders have many breakouts to evaluate. The market's hidden fractal structure is a new, broader, but more efficient prism through which to make these evaluations.

Fractal geometry can help you pick entry and exit spots in a single session, as we showed in "Value-able Entries and Exits" (Futures, August 1999) using our model, the Cash Flow Analysis Series. Here, we will superimpose the vertical mathematical relationships discussed previously on the horizontal time axis to form more complex fractal patterns to aid in evaluating breakouts.

A successful breakout must overcome certain hurdles. These new fractal patterns can help: 1) identify price levels relevant to a specific situation before they are obvious to the market-at-large, and 2) judge if a breakout will continue and become a longer-term trend -- or if it will fail. We'll monitor an actual breakout, but first some background.

Scaling To identify these reference points mathematically, you must start with a phenomenon found everywhere in nature called scaling. Scaling is the simple way nature has chosen to organize itself. As we move forward, you'll see how scaling is at the heart of logical decision making.

When scaling is present, a hidden fractal order produces an extremely complex whole by reiterating a few simple rules repeatedly across all scales (small, medium and large). The small, medium and large parts of this whole have a similar appearance in all scales. Two facts about this process make our analysis possible. First, the self-similarity that produces symmetry across scales also produces similar patterns within patterns in the same time scale. Second, these patterns at finer and finer scales have certain constant measurements.

The simple laws that govern scaling are universal; they act in the same way on plants, animals and financial markets. In financial markets, fractal geometry, which emerges from these universal laws naturally, identifies an internal network of price levels. These price levels help markets to distribute everything from currencies to corn to market participants in every corner of the globe.

"The fractal network" (right) shows the price levels that helped the Chicago Board of Trade (CBOT) Treasury bond futures market facilitate bond distribution during 1997, 1998 and 1999. The vertical axis reflects price (a range from 134-08 to 110-18) and the horizontal axis represents time. Note that we're talking about "market time," not artificial time segments arbitrarily defined by a session, a week or a month. Each price level reflects a view of value that market participants will test in shorter-term time scales as they move toward a long-term consensus about value.

The search for value is the central mechanism that fuels market activity. Broadly speaking, market activity results from an interaction between fixed physical rules on the one hand, and unpredictable human behavior on the other. Market participants' view of value is the link between the rules of fractal geometry and real-world events such as economic reports, political elections, drought and fiscal policy. Our fractal geometry identifies relevant price levels because the patterns all start with an accurate view of current value.

The fractal network The price levels in "The fractal network" are organized in seven columns. Each column represents a time scale from the longest-term on the left to the shortest-term on the right. Although there are an infinite number of time scales in any market, our first-hand observation of market activity for the past six years confirms that these seven time scales provide enough detail to catch important developments but, at the same time, not so much detail that you can't see the forest for the trees. One of the most valuable aspects of fractal geometry as a trading tool is that it selects a manageable sample size from a field of infinite possibilities. …

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