In order to make money in the market, you have to be in the market, right? As we hear so many times, the key to success in trading is simply to establish the right position and forget about it. In fact, enter-and-forget (also known as buy-and-hold) would be the very best approach to investing were it possible to know with certainty which position is the right one. In reality, such certainty of market direction is impossible.

Even though absolute certainty of market direction is impossible, markets frequently yield enough information to make a statistical analysis of direction possible. From time to time, however, there is simply not enough information available to warrant any sort of directional bet. Traders using conventional technical indicators often find that their best course of action is simply to remain out of the market until their indicators yield more conclusive results.

From the point of view of a fractal trader, conventional technical analysis is a mixed bag. For one, remaining out of the market from time to time is certainly a sensible practice. Staying on the sidelines reduces a trader's exposure to risk from bad trades. Where conventional technical methods often go wrong is the way they determine whether to be in or out. Indicators such as ADX or standard deviation bandwidth often keep a trader out of enough good trades to offset the benefit of occasionally staying out of the market. This isn't some unavoidable and costly tradeoff for risk management. It's the result of using indicators designed without a proper modeling of the markets themselves.

The key to knowing when to remain out of the markets stems from understanding the process which generates the stream of prices depicted in a price chart. In contrast with the random walk models used in classrooms or the more realistic trend oriented models, our fractal based approach takes into account the varying timeframes at which different market participants operate. Why does this matter? Most of the time, market prices are pushed and pulled in opposite directions by traders operating in many different timeframes. If the short term traders are all buying and the long termers are all selling, prices don't move very much. The real money making happens during explosive movements when traders in multiple timeframes all begin to push the market in the same direction.

An imperfect but illustrative mathematical approximation of this process would be the sum of several random walks of differing frequency. In the markets, these random processes aren't entirely random. They are all trying to outguess eachother. When all or most of them move in the same direction at the same time, a series of big discontinuous moves takes place. Trend traders join in if their indicators let them, random walkers dismiss the occasion as a 10 sigma event and fractal traders adjust the stops on the positions they established before the news broke. The key to success in trading is to work from models that keep you out of the market whenever appropriate but get you in when the different timeframes all manifest the same directional bias.

Nearly all traders stay on the sidelines from time to time. The difference is in the questions of when and why. Conventional indicators may offer some guidance but they are typically too far removed from the markets themselves. Without some understanding of how and why the markets move in the first place, traders have no reason to believe that any indicator contains useful information about the behavior of the market. The iSigma portfolio uses none of the popular three letter indicators. Instead, every entry and exit is based on the only reliable indicator we know, the markets themselves.