Financial markets are chaotic. Multiple theories try to eradicate randomness, and as such, the markets should be studied like any other natural system. Predicting the behavior of the ever-volatile market is a challenge. A new capital market theory has been developed to inculcate the chaos. The traditional, quantitative methods and the fractal concept are adopted in a bid to speculate and predict the market trend. A fractal is an irregular and complex trend not easily foreseeable into the future (Peters, 1996).
Fractal market is also referred to as investment horizon theory. This is defined through various hypothesis statements. Some hypothesis statements purports that the market is liquid when there are a large number of investors who have different time horizons. It is also important for the investors to maintain their time zones irrespective of any information. The available information may not be reflected on the market price in a real time basis. The market trend will often reflect the changes in expected earnings. However, if the fractal structure is not maintained, the market looses stability.
Markets are like a system of energy and money flow. Thus, it is important to study the predictability of the market trends. Some scholars have discussed fractal concept as a pattern used in the technical analysis to predict a repeat in the real time market trend. However, as a market indicator, the fractal concept is useful when used in conjunction with other indicators such as moving averages (Landini, 2011). For the fractal concept to hold and as such be applicable, it is important that the investor has the real time information. This implies that, for the investor to make the required decision as and when necessary, current information has to be reflected promptly on the market indices. The market has different time horizons, thus the different class of investors. According to the fractal concept, the market will remain stable as long as the difference in time horizon is maintained. In instances of time synchrony, the market looses its stability as this will imply all investors will be trading at the same time.
The fractal market concept makes it possible for investors to extrapolate a detailed map of the future price action. Therefore, this facilitates the market players to be aware of most waypoints along the way. The fractal method as a market indicator has five bars that facilitate its application and entry and exit points. The fractal pattern has five bars in its application to predict the price movements. For instance, when the lower bar is located in the middle of the trend pattern surrounded by two bars with successively higher lows, a shift from the down up trend will usually takes place. On the other hand, a shift from the uptrend to a downtrend occurs when two bars with successive low highs surround the highest bar located in the middle of the trend (Hohlfeld & Cohen, 1999).
Randomness as an idea is complex as it clashes with various facts or intuitions. In finance, randomness clashes with the tenets of economic rationality, sovereignty, or free intuition and even clear causality. Financial markets have developed methods to predict future market trends in a bid to eradicate randomness and increase investor’s chances of higher returns. Fractal concept is one of the many market indicators alongside the Fibonacci numbers and the moving averages. Fractal market indicator assists investors in predicting the repeating cycle in economic trends. Though it may sound complicated, experience makes it highly effective.
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