Financial Markets Are Not Random

Financial Markets Are Not Random

Updated: Nov 8, 2019

Many traders still consider day-to-day fluctuations in the markets to be random and unpredictable. I want to provide evidence that this is not true. At Quantium Research, we believe that the markets move in accordance with ancient geometric principles that permeate all layers of the cosmos. We believe progressions and regressions develop in a way which is neither random nor unpredictable.

By using a single market move as a case study, truly compelling commmonalities can be revealed within the internal structure of price action. Begin by studying the daily chart of BAE Systems in figure 1.

Figure 1

When the move which begins at point "A" and ends at point "B" is dissected, it becomes clear how the components of the move fit together in relational harmony. You may be confused as to why it begins at point A, and not the actual low which came a few bars earlier. A common misconception is that one move must begin where the previous one ended. That is not necessarily true. While the previous move down did end on the actual low, I will consider the new upward move to have begun on the strong reversal candle at A. It will become clearer how to identify this shortly. This move from A to B can be split into 5 smaller swings, as shown in figure 2. The beginning and end of each swing are connected with a blue line, and each swing is enclosed within a colour coded box: green for progressive swings, red for regressive ones. I’ve also labelled each swing 1 through 5 so that the purple label marks the end of the swing. For example, swing 1 ends at the purple 1, swing 2 ends at the purple 2 and so on.

Figure 2

If you’re an Elliottician, this may be starting to look familiar as an impulse wave. However, be careful – this is not exactly the same thing. Elliott Waves are fractal structures whereas here I’m just looking at market swings without consideration of the internals of each swing. A correct Elliott interpretation may look different.

Look at swings 1 and 2 in figure 3. The coloured boxes have been removed to reduce congestion.

Figure 3

Swing one advances 61.4p, a very close derivative of 61.8%, no doubt. Coincidence? Maybe. Swing 2 is choppy, sharp and ugly. It is rangebound and bounces 7 times. When swing 1 is divided into the Fibonacci ratios (the blue horizontal lines), it is clear that swing 2 terminates right on the 0.618 retracement level just above the red arrow. If you’re not familiar with the concept of Fibonacci ratios and retracements, read our other article explaining them and then come back here to see them applied in context.

Onto swing 3 in figure 4. This time, swing 1 is divided into the Fibonacci ratios again, but the levels are moved upwards so that the 0% is aligned with the beginning of swing 3. This is just an application of the key levels derived from swing 1 by transferring them onto swing 3. As you can see, swing 3 is a healthy upward progression which terminates exactly on the 1.618 extension level. That is to say, swing 3 is exactly 1.618 times the distance of swing 1.

Figure 5 shows that swing 3 is also a 2.618 extension of swing 2 (red Fibonacci levels). That means that swing 3 was in a strong uptrend and only reversed when it ran into a cluster of Fibonacci levels based on both swing 1 and swing 2 which came before it. That cluster would have been an excellent price target when swing 3 was just beginning.

Figure 4

Figure 5

Figure 6 looks at swing 4. Swing 4 is a straight forward retracement of swing 3. It declines and reverses on the 50% level above the red arrow. That means swing 4 was half the length of swing 3.

Figure 6

The final swing of this rally, swing 5, can be considered the most significant because its termination is also the end of the entire move. The end of swing 5 finalises the move and locks the proportions permanently in place. Look at the significance of the end of swing 5 in figure 7. Firstly, swing 5 ended at the point where swing 5 is equal to 0.5 of the entire move. This is because when the entire move is divided into the Fibonacci ratios (red levels), swing 5 begins right on the 50% level (by the red arrow) and it ends, of course, on the 0%. Recall that this is also the 50% level obtained by dividing swing 3 into the Fibonacci ratios (blue levels).

Figure 7

Now, not only is this move comprised of 5 swings which are all connected via Fibonacci, but they are also proportional to the whole of which they are a part. Swing 2 is 0.618 times swing 1, swing 3 is 1.618 times swing 1 and 2.618 times swing 2, swing 4 is 0.5 times swing 3 and swing 5 is 0.5 times the whole move. Apparently, the progression of this move was anything but random. Each component built off the last.

This can be taken a step further. Proportion is often analysed in the markets with regard to price, but rarely with regard to time. It may be unclear why, when forming a high or a low, the market often seems to hover around an area before reversing into the next move, as BAE does around the end of swing 5. Consider that Fibonacci can influence market moves with regard to the time axis too. The market spent 8 days hovering around the high at the end of swing 5. Why did it choose that specific day to make the actual high before reversing? Because that is the bar which meant that the entire move had lasted 161 days. 161 is a derivative of Phi (1.618) when you float the decimal point. Look at figure 8. I have labelled the time elapsed at the end of each swing.

Figure 8

Taking the time analysis a step further, the sum of the 3 progressive swings (1 , 3 and 5), is 34 +49 + 16 = 99. When that is divided by the duration of the whole move, the result is 99/161 = 0.615, which is about as close to 0.618 as we can get. That calculation reveals that roughly 61.8% of the time of this rally was spent in upward swings, and roughly 38.2% in downward swings.

Clearly this rally is drenched in mathematical proportion and geometric harmonic unity. It is not a one-off. Know how to look for it and you will find the same degree of connectedness in swings of every chart you look at. Proportion is a feature of all markets across all time frames. These ratios repeat again and again throughout nature, and indeed, the markets.

Markets are not the random roulette wheel they are often accused of being. Underneath the apparent chaos, there are very precise ordering principles which carry with them a certain degree of predictability.