A contrarian Directional Change strategy using a Fractal Engine Model

Abstract

Scaling Laws have been discovered by relating two variables to each other. With these laws a Directional Change (DC) Trading strategy can be developed in a Foreign exchange portfolio. Forex is used due to its exceptional characteristics. A Coastline trading strategy is developed using four currencies, and for each currency a contrarian Directional Change trading strategy is applied. The dissertation proposes a multiple threshold system. These Thresholds are not random but are Fibonacci ratios. Fibonacci Thresholds for four currencies are applied. With the directional change engine, the Fractal Engine Model (FEM) is constructed and fractals are found periodically. A portfolio is constructed using the fractal weights. The results obtained are compared with a simple Buy and Hold strategy and a Simple Moving Average Strategy. When Fractals are obtained, the dissected data could be observed as to degree that the price harmonizes with the Fibonacci retracement levels to form the Elliot wave principle. With this, Technical analyst could improve their market entries and exits.