ALPHA20TM trading system applies fractal filters to define trends and counter trends. A fractal is a rough geometric shape that can be split into parts, each of which is at least approximately a reduced-size copy of the whole (Figure 1). In nature typical approximations of fractals are coastlines, river networks, and mountain ranges. These objects express a self-similar structure.
The word fractal was coined by Benoit Mandelbrot (1924-2010). Mandelbrot characterized two key patterns by borrowing from Genesis: 1. the Joseph Effect describes persistence after Joseph’s interpretation of Pharaoh’s dream when prosperous years are followed by lean ones. In other words, trends tend to persist; and 2. the Noah Effect describes discontinuity after the story of the Great Flood. When something changes, it can change abruptly.
Figure 1 | A Satellite Image of the Amazon River with Self-Similar Fractal Structures.