Notes on Fractal Exit Points

Fractal Exit Points (FEP) can be used to set stop losses in a manner completely unrelated to the mathematical machinations of percentage of loss and multiples of ATR. FEP are determined by market movement, specifically the lows over a minimum of five days. For more information and examples see below

Fractal Exit Points

Simplest Form

Two Slightly Different Formulations

Situations Complicated By An Equal Value

When The Potential FEP Is Followed By An Identical Low

Unconfirmed Or Failed Anticipatory Fractals

An Example In the Application of Fractal Exit Points

[Top]

Simplest Form

In the simplest form – a fractal exit point is created when on day D

For the two days before D

The intraday low of the day (D) is less than the day before (D-1)
The intraday low of the day before (D-1) is less than the day before it (D-2)

For the two days after D

The intraday low of the day D is less than the day after (D+1)
The intraday low of the day after (D+1) is less than the day after it (D+2)

Put another way

If L(Dx) = low of day x
and
L(D-2) >   L(D-1) > L(D) < L(D+1) <   L(D+2)    (FEP1)
L(D-2) >= L(D-1) > L(D) < L(D+1) <= L(D+2)    (FEP2)

Then day D is a fractal exit point. The FEP can only be determined in hindsight. Day D is not today. At a minimum it is two days ago.

[Top]

Two Slightly Different Formulations

There are two slightly different formulations for fractal exit points. The difference between FEP1 and FEP2 are the equals signs. When we refer to FEP we are referring only to FEP2.

Here are several examples. Numbers 5, 6, and 7 represent the low price during several sequential days.

7                                7
        6                6
                5

Simplest (perfect) form - the 5 is an exit fractal because

L(D-2)=7  > L (D-1) =6  > L (D) =5 < L (D+1) = 6 < L(D+2) =7

[Top]

Situations Complicated By An Equal Value

7        7                        7
                        6
                5

Equal value is considered to have the same effect. In this case 5 is an exit fractal because 7-7 (7 and then 7, not 7 minus 7) counts as two previous values above 5 but the one closest to the 5 is not higher than the next previous one.

7        7
                        6        6
                5

5 is an exit fractal. 7-7 is as above. The first 6 is above 5 and the second 6 is not below the first 6.

[Top]

When The Potential FEP Is Followed By An Identical Low

7                                        7
        6                        6
                5        5

The second 5 makes the first 5 an anticipatory exit fractal. The second 6 makes the second 5 an anticipatory fractal. The second 7 confirms the second 5 as an exit fractal. Stop losses are NOT adjusted on the basis of anticipatory fractals.

[Top]

Unconfirmed Or Failed Anticipatory Fractals

7                                                7
        6                6                6
                5                5

The second 6 made the first 5 an anticipatory exit fractal that failed when the second 5 appeared. The second 5 becomes an anticipatory exit fractal when the third 6 appears. The second 5 becomes a confirmed exit fractal when the second 7 appears. Stop losses are NOT adjusted on the basis of anticipatory fractals.

[Top]

An Example In the Application of Fractal Exit Points

Each day (whether that issue is held or not) the lows are evaluated to see if there was a new FEP on a previous day. That previous day may be D-2 (for a perfect FEP) or another day (see examples above).

Remember, STOP_LOSS is a separate value, we don't adjust the FEP value depending on whether or not we hold the issue.

When an issue is purchased the first FEP based stop loss used may have been determined many days ago.

A sample sequence. Dot dot dot ( . . . ) indicates a gap in date sequence where no activity would have effected the FEP.