✔️ Information reviewed and updated in December 2023 by Eduardo López
Before we start talking about the Fractal Dimension indicator, it is necessary to clarify what a trading indicator is and what it is for. Technical indicators are mathematical tools that are graphically plotted as patterns on trading charts.
These indicators analyze the opening price, closing price, high, low and volume. There are more than ten types of indicators, and they can be used by anyone with trading skills.
There are also cases of operators who use combinations of indicators to be able to have a better analysis and thus make better decisions when investing.. So now that you know a little more about what indicators do, we will show you what the function of the Fractal Dimension Index indicator is. One of the indicators that can be more difficult to understand but that can help traders.
➡Definition of the Fractal Dimension Index indicator✨
This indicator is based on the shape of the graph to determine if it has a high degree of trend or randomness. It measures the fractal dimension of the market by analyzing resized ranges and its value is between 1 and 2.
Its main objective is to determine if there is a market trend or if it remains within a fluctuation band. It does not allow to define the direction of the trend.
➡What is the Fractal Dimension Index for? ✨
This indicator is useful when you have to determine market volatility, since indicates us at its maximum that there is a period of high randomness and that it is probable that the course may change and start a trend.
➡How do you get the Fractal Dimension Index? ✨
There are many methods to obtain the fractal dimension, however, the most common is to evaluate the volume and area in space where the set is located.
The calculation can be performed using the Hurst exponent or by the cell dimension method.
The Hurst exponent is determined from the assumption. Although one of the disadvantages of this method is that a large amount of data is required to obtain a reliable estimate of this exponent, and if not, the results may be incorrect.
➡How is it interpreted? ✨
The indicator is between 1 and 2, with 1 being the maximum value and 2 being the maximum roughness value.
Values below 1.5 mean that the price series are persistent and that the market is trending.
On the contrary, a value above 1.5 means that the market is moving in a fluctuation range and acting randomly.
When the indicator exceeds the value of 1.5, it is considered a good time to start taking the most current highs and lows as a reference and to position yourself to buy or sell quickly when these values have exceeded.
➡Reasons to use it✨
Two of the reasons for using this indicator is that it helps determine when the characteristics of the time series change, and the forecast that exists in a time series.