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This Fractal dimension indicator is based on fractal analysis and Chaos theory and it was developed by John Ehlers and Ric Way. This trading indicator was introduced in the article "Fractal Dimension As A Market Mode Sensor" in the Stocks & Commodities magazine and it is a modified version of the fractal dimension index, which uses the time and price data to determine the trendiness or volatility of a given asset, market or security.
Fractal dimension indicator is a powerful technical analysis indicator that uses several functions to calculate a metric that will tell us the likelihood that the market follows a random walk. If the market is likely following a random walk then it will be very difficult to predict it using techniques such as technical analysis. In this case, it is better to search for and find another security or stock to trade, a one that is more predictable based on the Fractal dimension indicator.
The fractal dimension indicator can be interpreted as follows:
- A value between 1.4 and 1.6 suggests that the market is in a random walk and that it is unpredictable.
- Profit earning increases as the market deviates from the 1.4-1.6 range. This increase is proportional to the distance between the fractal dimension indicator value and the 1.5 level.
- The greater the deviation from the 1.5 level the higher the probability that the market is not acting randomly and that it is possible to predict future movements and therefore make profit.
