THEFRACTAL

THEBREAKAWAYTRADE
Manyexperiencedtraderssaythatmakingmoneyintradingthemarketsiseasy;whatisdifficultis
keepingit.Thepatternofallmarketsisthattheyspendmostoftheirtimegoingnowhereandonlya
smallamountoftime(15to30percent)inidentifiabletrends.Traderswhoarenotonthefloorand/or
notspecialistshaveatoughtimewhilethemarketisnotmoving.Mosttradershaveatendencytoplace
theirstopstooclosetothemarketandconsequentlygetwhiplashed.Still,thegreatestpotentialfor
profitsoccurswhenthemarketsaretrending.Therefore,ourfirstconsiderationistonotbeleftoutof
anysignificanttrendmove.Remember,thisisthefirstofourfiveentrysystems,anditisthefirstsignal
wetakeaftertheAlligatorstartstoawaken.
FRACTALBREAKOUT
AswesawinChapterThree,wewanttostayoutofthemarketand"keepourpowderdry"untilthe
Alligatorishungryandstartshissearchforfood(eitherhigherorlowerprices).Wedonottakeany
tradesuntilthisfirstfractalistriggered.Let'stakeanotherlookatatypicalstockand/orcommodity
market(Figure41).
ATypicalTradingMarket
Figure41showstypical"generic"marketaction.Themarketspendsfrom70to85percentofitslife
goingnowhere.Inthatportionof
Figure41Atypicaltradingmarket.
marketaction,mosttraderslose;abouttheonlyonesmakingprofitaretradersonthefloorwhoare
fadingthemarketinaveryshorttimeperiod.Themostcrucialpointiswherethelastbottom(lowpoint)
occurs.Mytradingtechniques,includingthefivemagicbullets,arethebestwehaveeverseenfor
findinganybottomortop.TheAlligatorwillhelpustogetinonarealtrendandstayoutofmostrange
boundtradingthateatsawayatourprofits.
THEFRACTALPATTERN
Thefractalpatternisasimpleone.Themarketmakesamoveinonedirectionortheother.Aftera
periodoftime,allthewillingbuyer~,havebought(onanupmove)andthemarketfallsbackbecauseof
alackofbuyers.Thensomenewincominginformation(Chaos)beginstoaffectthetraders.Thereisan
influxofnewbuying,andthemarket,findingthatplaceofequaldisagreementonvalueandagreement
on price, moves up. If the momentum and the buyers' strength are strong enough to exceed the
immediatelyprecedingupfractal,we
Figure42ThefractaLpattern.
wouldplaceanordertobuyonetickoverthehighofthefractal.Let'sexaminesometypical
fractalpatterns.InFigure42,youseeanidealizedfractalsetupinPatternA.Thetechnicaldefinitionof

afractalis:aseriesofaminimumoffiveconsecutivebarswherethehighesthighisprecededbytwo
lowerhighsandisfollowedbytwolowerhighs.(Theoppositeconfigurationwouldbeapplicabletoa
sellfractal.)Onewaytovisualizethisistoholdyourhandoutstretchedinfrontofyouwithyourfingers
spreadandyourmiddlefingerpointingup.Yourfingersareyourfiveconsecutivebars,andyourmiddle
fingeristhehighest,creatingafractalformation.Inanupfractal,weareinterestedonlyinthebars'
high,andinadownfractal,weareinterestedonlyinthebars'low.Itisimportanttonotethefollowing
restrictions:
1.Ifthecurrentbars'highisthesameheightasthemiddleorhighbar,itdoesnotcountasoneofthe
fivebarsnecessarytoformafractal.Forabuyfractal,youmusthaveahighthatisprecededbytwo
lowerhighsandfollowedbytwolowerhighs.Forasellfractal,youmusthavealowthatisprecededby
twohigherlowsandfollowedbytwohigherlows.
2.Upanddownfractalsmaysharebars.Thesamebarcanbepartofbothanupandadownfractal.
NotethatPatternBfulfillsalltherequirementsforafractal.Thetwoprecedingandthetwofollowing
barscanhaveanyhigh,solongasthathighisnothigherthanthemiddlebar(finger).PatternBthenis
bothanupfractalandadownfractalbecausebothprecedingbarsandbothfollowingbarsareinside
barswhencomparedtothemiddlebarofthefractal.PatternCshowsanotherformationthatcreatesboth
anupfractalandadownfractal.Asshown,thesefractalsmay"share"bars.PatternDrequiressixbars
toformanupfractalbecausethefifthbarhasahighequaltotheprevioushighesthigh.Theworking
definitionisrepeatedhereforemphasis:
Afractalmusthavetwoprecedingandtwofollowingbarswithlowerhighs(higherlowsinadown
move).Inabuyfractal,weareinterestedonlyinthebars'high.Inasellfractal,weareinterested
onlyinthebars'low.
Fractalstellusagreatdealaboutthe"phasespace"ofthemarket'sbehavior,butwecanimproveour
tradingbyknowinghowafractal'sbehavioralfunctionschangeasthemarketmovesfromhightolow
andbackagain.Onceafractalisformed,itwillalwaysbeafractal,buttheroleitplaysdependsonits
locationinrelationtotheAlligator'smouth.Figure43showsbothabuyandasellfractal.Ifthebuy
signalisabovetheRedBalanceLine(theAlligator'sTeeth),wewouldplaceabuystoponetickabove
thehighoftheupfractal.IfthesellsignalisbelowtheRedBalanceLine,wewouldplaceasellstopone
tickbelowthelowofthefractalsellsignal.Itisessentialtounderstandthatwewouldnottakeafractal
buysignalif,atthetimeitishit,thepriceisbelowtheRedBalanceLine.Likewise,wewouldnottakea
fractalsellsignalif,atthetimeitishit,thepriceisabovetheRedBalanceLine.Thisisthebestmethod
wehavefoundtofilteroutnonprofitablefractaltrades.Onceafractalsignalisformedandisvalidin
relationtoitspositionoutsidetheAlligator'smouth,itremainsasignaluntilitishitoruntilamore
recentfractalsignalisformed.
Figure43TheinitiatingfractaL.
Figure44showsavarietyoffractalpatterns.Fractalbuysareintheuppersectionandfractalsells
areinthelowersection.Rememberthatalthoughafractalformationmaybetriggered,ithastobe
filteredthroughtheAlligator.Inotherwords,youwouldnottakeabuyifthefractalisbelowthe
Alligator'steeth,andyouwouldnottakeasellifthefractalisabovethealligator'steeth.Figure45
providesaquickreviewoffractalcharacteristics.TheunderlyingstructureofthemarketistheElliott
Wave, andtheunderlying structureoftheElliott Waveis thefractal. Beingabletolocate fractals
properlyallowsatradertobeprofitabletradingtheElliottWavewithouthavingtoknowwhichwave
themarketiscurrentlyin.Afractalisalwaysachangeinbehaviorthatiscausedbynewincoming

information(Chaos).Afractalisalwaysabreakoutsignal,soyouwouldexpectsomesatisfactionsoon
becauseyouarebuyingthehighorsellingthelow.(Inotherwords,youhavetheworld~sworsttrade
locationwiththegreatestpotentialloss.)Inlaterchapters,youwillseehowtoovercomethispossible
disadvantageandturnitintowhatwerefertoasthe"lowrentdistrict."
PracticeinLocatingFractals
MarkthefollowingfractalsonFigure46:
A.Locatetheonebuyfractalandthetwosellfractalsthatareinsidethebox.B.Locatethebuyfractal
andsellfractalinsidethebox.C.Locatethetwobuyfractalsandsellfractals.n.LocateallthebuJ7and
sellfractals.
CheckyouranswersagainsttheanswersinFigure47
Figure47AnswerstofractaLpracticepage.
AnswerstoPracticePage
AsshowninFigure47:
A.Thereisonebuy(B)andtwosells(S).
B.Thereisabuyandasellonthesamebar.
C.Therearetwobuysandtwosellsinsidethebox.
D.Hereisagoodexampleofatrendingmarket.Notethatallthefractalbuysignalswerehitbutnoneof
thefractalsellsignalswashit.
Inthispracticeexercise,wearenottakingintoaccountthelocationoftheAlligator.Ourpurposeatthis
pointistogaintheabilitytorecognizethefractalbuyandsellsignals.Nowlet'sexamineanother
practicechartandlocatethefractalbuyandsellsignals.
Rgure48PracticepagetoLocatefractaLbuyandseLLsignaLsforcoffee.
Figure48isanothercharttopracticeon.Remember,wearenotconsideringtheAlligatoratthis
point.Trytolearnhowtorecognizethefractalsquicklyandeasily.Payparticularattentiontoallthe
fractalsthatarehit.Figure48isagoodbullishexample.Hadyoutradedthiscoffeemarketonadaily
basis, using all five dimensions outlined in this material, you would have realized profits of over
$~00,000intwomonths.InFigure49,youwillseehowthefractalsignalscontributedtothisvery
profitabletrade.StudyFigure49carefully.Themarketconstantlygivesopportunitieslikethiscoffee
move.Usingmytradingtechniquesand/orsoftware,youwillknowexactlywhatordertoplace,where
toplaceit,wheretoprotectyourequity,howtoallocateyourassets,andwhentotakeprofits.Boththe
buyandsellfractalsaremarkedinFigure49.Noticethatduringtheentire3l/2monthsnoneofthe
fractalsellsignalswashitandallofthefractalbuysignalswerehitexcepttheveryhighest
TABLE41ResultsofTradingOnlytheFractalSignalsonFigure49(December16March10).
Date

16Dec2Jan8Jan23Jan29Jan4Feb14Feb20Feb26F~b10Mar
Figure49Answerstothepracticepage.
bar.Table41indicatestheentrydatesandprofitfromthefractalsignalsonthecoffeechartshownin
Figure49.InFigure410(coffee)andFigure411(DellComputer),wehavecombinedfractal
signalswiththeAlligatortoaidusintradediscrimination.RememberfromChapterThreethatweonly
wanttotakesignalsoutsidetheAlligator'smouth,andwealwayswaituntilthefirstbuyorsellfractalis
hitbeforetakinganyoftheotherfourpossiblesignals.InFigure410,noticethatthefractalbuyat
number1wasthefirstfractaloutsidetheAlligator'smouththatwashit.Noticealsothatpointsaandb
arebothsellfractalsoutsidetheAlligator'smouthbutneitherofthesewashit.Afterthefirstfractalbuy,
wewouldtakeanyandallbuysignalsthatarehit.AslongasthepricesstayonthetopoftheAlligator's
mouth,wewouldnotevenbothertodeterminewherethesellsignalsarebecausewewillnottakeany
sellsignalswhenthepriceisabovetheAlligator'smouth.Thismakestakingsignalsveryeasy,simple,
andefficient.
Fractal

Points

10825
11605
11665
13405
13725
14205
16390
16605
16::~C5
17245
TotalPts.

6240
5640
5590
3840
3520
3040
855
640
340
29705
$111,393.75

Figure411CombiningthefractaLsignaLswiththeALLigatorinaDeLLComputerstockchart.
InFigure412therearefourcharts.Forpractice,seewhetheryoucanlocateallthe"valid"fractalbuy
andsellsignals.Rememberthatthemiddleline(whichwecolorredonactualcharts)istheTeethline,
andwetakeanyfractalbuysignalthatishitabovethislineandanyfractalsellsignalthatishitbelowit.
ItisalsovitaltounderstandthatthecriticalfactoriswherethesignalisHIT,asopposedtowherethe
signalisFORMED.IfthesignalishitoutsidetheTeeth,wetakethattradenomatterwherethefractal
mighthavebeenformed.OnthechartsinFigure413,thesevalidbuyandsellsignalsoutsidethe
Alligator'steetharemarkedwithupanddownarrows.Thearrowssignifywherethemiddlebarofthe
fractalislocated.Theentriesarewhenthatsignalishit.IntheHarleyDavidsonchartinFigure414,
there are nine valid fractal signals. Remember that a valid signal must be moving away from the
Alligator'smouth.AllthepricebarsareabovetheAlligator'smouth,sowewouldnottakeanysell
fractals. We do not want to feed Figure 412 Finding the fractaL buy and seLL signaLs that are
vaLidatedbytheALLigator.theAlligator.Itshouldbeobviousatfirstglancethatwewouldnotwantto
beshortatanypointduringthetimeperiodofthischart.(TheanswersareshownonFigure415.)The
numbersonFigure415locatetheninevalidfractalbuysignalsfortheHarleyDavidsonstockduring

thisperiod.Totestyourself,identifyninefractalsellsignalsthatwouldnothavebeentakenbecause
theyareabovethemiddle line(Teeth)oftheAlligator'smouth.UsingtheAlligator asyour"odds
maker"shouldgreatlyenhanceyourtradingprofitsandkeepyouintunewiththecurrentmovementof
anymarketsineitherstocksorcommodities.
FRACTALS"INSIDE"THEALLIGATOR'SMOUTH
TomakesurethatyouunderstandtradinginsidetheAlligator'sImouth,hereareacoupleofcharts
demonstratinghowtotradeinthissituation.
Figure413Answerstotheva~idfractaLsinFigure412.On~ythefractaLsthatarehitaremarkedwith
arrows.
InFigure416,aCocaColastockchart,pointAisnotavalidbuyfractalbecause,onthelastbar,
thefractalpriceisstillbelowthemiddle(Teeth)lineoftheAlligator'smouth.PointB,howeverisa
validfractalsellsignalbecauseitisbelowtheAlligator'sTeeth(middleline).Figure417,achartofLiz
ClaiborneInc.,illustrateshowaninvalidfractalsignalbecomesavalidfractalsignal.InFigure418,the
buyfractalisbelowthemiddleline(Teeth)oftheAlligatorand,whenformed,isnotavalidbuysignal.
However,afterthefractaliscompletedonthebarprevioustotheonelabeled1,itbecomesavalidbuy
fractalsignalbecausethemiddleline(Teeth)isbelowthefractalbuysignal.Hadanyoneofthebars
numbered1through~goneabovethefractalbuy,itwouldhavebeentaken.Figure418isanother
exampleofhowaninvalidfractalsignalbecomesvalid.Afractalbuysignalatpoint2iswellbelowthe
Alligator'smiddleline(Teeth)whenitistriggeredatpoint3.Point3formsanotherbuyfractalsignalat
theverticallinelabeledA.Theintersectionbetweenhorizontalline3andverticallineAisjustbelow
the
Figure418HowaninvalidfractaLsignaLbecomesvaLid.
Alligator'smiddleline(Teeth)andthereforeisnotavalidbuysignalatlineA.However,atlineB,
itbecomesavalidsignalbecause,ifitweretriggered,itwouldbeabovetheAlligator'smiddleline
(Teeth). This example, combined with the previous examples, should illustrate how the Alligator
becomesyourdecisionandoddsmakerwhentradingeitherthestockorcommoditymarkets.Youmay
wishtodownloadourfreefullyfunctioningdemofromtheInternetandpracticewithothercharts.Itis
veryimportanttobeabletorecognizeallfractalbuyandsellsignalsandtodeterminewhethertheyare
valid.
SUMMARY
Inthischapter,wehaveexaminedthe"phasespace"signalwelabelasafractal.Afractalisa
behavioralchangeandmustbeevaluatedaccordingtowhatishappeningintheoverallviewofamarket.
Thetechnicaldefinitionofafractalis:Aminimumoffiveconsecutivebarswherethehighesthighis
higherthantheprevioustwobars'highsandalsohigherthanthefollowingtwobars'highs. The
oppositeisasellfractal.Ourfirstsignalentryintoanymarketisalwaysthefirstfractaloutsidethe
Alligator'smouth.Oncethissignalishit,wewilltakeanyandallsignalsthataretriggeredinthat
direction.Atthispoint,youshouldunderstandandbeabletolocatequicklyanybuyorsellfractal

signals. You should also be able to tell at a glance whether a signal is valid, depencling on its
relationshiptotheAlligator'smouth.Remembertokeepthissloganinyourmind:
~onot~adthaalligatorl
Inthe nextchapter, wewill examine anotheraspect ofthe underlying structureofthe market: the
market'smomentum.Wewillusethebestindicatorthatwehaveeverseeninover40yearsofactiveand
successfultrading.Thisistheonlytrueleadingindicatorwehaveeverfound.Becauseitissuchagreat
leadingindicator,itiscomparabletoreadingtomorrow's WallStreetJournal today.Thereasonthis
workssowellis:priceisactuallythelastthingthatchangesinthemarket.Momentumchangesbefore
price,andwewilllearntousemomentuminthenextchapter.Istronglyurgeyounottoreadfurther
untilyouhavemadefractalrecognitionsecondnaturetoyou.