Is Day Trading Possible?

Day trading is possible because price movements follow fractal patterns, displaying similar behaviors across different timeframes. Whether you're looking at a 5-minute chart or a daily chart, the price oscillations appear similar, a concept explained by mathematician Benoit Mandelbrot’s fractal geometry. This scale-invariance means that the same analysis techniques can be applied across different timeframes.

What is Scale Invariance?

When analysing price charts, you'll notice that price movements follow similar patterns, or oscillations, across all timeframes. The only difference you may notice is the gap at the beginning of week which will appear bigger on lower timeframes.

Essentially, if you were to remove the time and price axes from a chart and cycle through different timeframes, you’d struggle to tell them apart. A 5-minute chart could look very similar to a 1-hour chart, and a 15-minute chart might resemble a 4-hour chart. For example, just looking at candles we wouldn't know which time frames these are:

This is because price movements are "scale-invariant," meaning they display a form of symmetry regardless of the scale you’re looking at.

This phenomenon is not exclusive to trading, it aligns with the findings of mathematician Benoit Mandelbrot, who introduced the concept of fractal geometry. In his book, The Misbehavior of Markets, Mandelbrot explained that financial markets also exhibit fractal characteristics. A fractal is a pattern that repeats itself at different scales, maintaining a self-similar structure regardless of zoom level.

To illustrate this, Mandelbrot used an example from his paper, How Long is the Coast of Britain?. If you measure the coastline with 100-kilometer units, the length might be 2,800 kilometers. But if you use 50-kilometer units, the length increases to 3,400 kilometers. The more zoomed-in the measurement, the longer the coastline becomes. Similarly, in the financial markets, the smaller the timeframe, the more detail you can see.

Just as a zoomed-in segment of coastline mirrors a larger section of coast when viewed from farther away, price movements have similar structures at different timeframes. Whether you're looking at the 5-minute or weekly trends, the oscillations are self-repeating.

This fractal nature of price movements is important to the concept of day trading. Asset manager Ed Peters expanded on Mandelbrot’s ideas by developing the Fractal Market Hypothesis (FMH). According to FMH, price movements are not random, but instead follow fractal patterns that show similar behavior across various time intervals.

Peters also noted that different market participants operate on different timeframes. Long-term investors focus on broad price trends, while short-term traders, like day traders, concentrate on smaller fluctuations. Together, these participants bring liquidity to the market and create balance.

However, when external shocks, such as unexpected news, hit the market, it can disrupt this balance, causing extreme price swings. During these times, all participants tend to focus on short-term movements, leading to greater volatility, which is similar to herd behavior in the markets.

What Does This Mean for Trading?

For traders, this fractal nature means that the same analysis techniques can be applied across different timeframes, whether you're trading intraday or over longer periods. If something works on one time frame, it should also work on other time frames, whether they are long-term or short-term.

Since price structures repeat across various scales, this makes trading on shorter timeframes, such as those used by day traders possible.

However, there are other things we may need to consider. For example, day traders may be more limited in the assets they trade as less liquid assets tend to have wider spreads, and economic releases can cause more volatility on lower time frames.