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Fractals Predicted the Crash of March 12th 18 Days Earlier

The Trade of Q1 2020

Bill Williams was a famous trader in the 80's and 90's. He is known by his moniker the king of bonds because of his success as a trader in the bond market. He had a degree in engineering physics and psychology. He wrote a number of books on trading and the behavioural patterns of market participants in a way that could be strategized.

He is the creator of multiple indicators that have been proven succesful over years of time, and recently one could have been used to gain prior knowledge of the March 12th BTC crash of over 3000 USD in one day. The most incredible part was it was confirmed by the indicator on the close of February 24th. If used to determine a bearish bias on the market, that trade would have been entered in at 9656, and the crash had a final bottom of 3892. The total yield: %58 in 17 days.

Fractals

Bill Williams did not discover fractals. They are a natural mathematical phenomenom. Instead he linked the use of these fractal-like patterns in markets, which happened to have a knack for showing up during major trend reversals. Don't let the word fractal scare you, it is not technical or math oriented, it is simply a shape. In this video, Williams explains in great detail what I am describing here and it is well worth the watch.

Fractal Patterns

Fractal pattern example courtesy of Investopedia

In the simplest terms, a fractal occurs when a price has two candles prior and following that close lower/higher than the fractal candle. Fractals are not rare in financial markets and occur almost every 5 minutes on lower time frame charts. As always, the time frame carries great weight to the force behind these patterns. This particular pattern that became full formed on Feb. 24th was on the daily time. giving it significant weight in one's calculation of multiple factors in determining directional bias of the market.

The Chart

BTC Fractal 2-24

Fractal patterns are how a certain group of candles with several fractals coincide with one another. It is very simple, Investopedia offers an easy to follow explanation:

Bearish Fractal=
High(N)>High(N−2) and
High(N)>High(N−1) and
High(N)>High(N+1) and
High(N)>High(N+2)

Bullish Fractal=
Low(N)<Low(N−2) and
Low(N)<Low(N−1) and
Low(N)<Low(N+1) and
Low(N)<Low(N+2)

If you then look at the chart, there is a very clear example of a bullish fractal pattern getting full confirmation on the 24th, and having started the formation two fractals before it. One thing people find confusing at first is the idea of a fractal being the green or red arrow, it is not. The fractal is the candle itself, the arrow simply indicates when a fractal has occurred. Where that candle closes determines if the fractal is higher or lower than the last one that formed.

The arrows are circled by ellipses, highlighting the total pattern from start to finish. In terms of the patterns above, High(N) is the highest fractal, which occurred on Feb. 13. Now track backward two fractals, they are both lower, do the same with the preceding fractals, they are also both lower. This is in accordance with the bearish fractal pattern.

Confluence

It only adds to the validity that this occurred near two major levels. Firstly, the price broke above the 0.382 Fibonacci level, in a retracement drawn out from 20k at the top of the '17 bull run, down to the market bottom of '18 of 3100. If you do not know much about Fibonacci retracement, watch this video. In short it is another mathematical phenomenom that occurs in both nature and financial markets.

So what does that mean? Well it broke that Fibonacci level, which was essentially just one resistance level, but subsequently hit weekly resistance, and weekly time frame trends are stronger than daily, so it naturally followed the rules and had a pullback, instead of continuing the bullish trend. Thus forming the bearish fractal pattern.

The Take Away

There are many indicators. There are many levels. Yes financial markets are complex, but they are not complicated. They are, at their core, comprised of humans interacting with humans, and we all see the same data at the same time. It becomes very easy to trade once one understands herd mentality and a bit of psychology, just like the King of Bonds did. Financial markets are a natural occurrence, which is why these mathematical phenomena hold up so well in analyzing trends.