Do you know how to trade with the best Fractal Trading Strategy? This Fractal Trade will answer all of your questions about fractals. You’ll learn how to use this strategy step-by-step to hit consistent winning trades.
Today, we will dive into a strategy that trades with the Bill Williams Fractal Indicator/ Bill Williams Alligator.
Before we start trading using fractals profitably, I want to give you some background information on Bill Williams himself. This will help you understand the significance of these special indicators. Also, read about Scaling in and Scaling out in Forex.
Mastering Fractal Trading with Bill Williams: A Comprehensive Overview
Mr Williams developed a unique theory by combining the Chaos Theory with trading psychology. Along with the effects they have on the market movement. Bill William’s vast knowledge of stocks, commodities, foreign exchange markets, led him to develop many indicators, including fractal trade patterns.
These include the Accelerator/Decelerator Oscillator, Alligator, Awesome Oscillator, Fractals, Gator Oscillator, and Market Facilitation.
Each indicator has a specific value. They are great to trade with if you understand the basic concepts of each one.
His market view was: in order for you to make money trading, you must be able to understand that basic market structure. You must be aware of the market’s internal parts, which he called dimensions.
These dimensions include the following:
- Fractal (the phase space)
- Zones ( the phase energy and force combination)
- Momentum ( the phase energy)
- Deceleration/ Acceleration (the phase force)
- Balance Line (odd attractors)
I could go on for quite a while about Bill Williams. But the important part to note about all of this is that his analysis and perspective of the market were different. These powerful indicators are not outdated, as some claim. They work very well when you apply the right strategy.
His indicators come standard on most trading platforms. These indicators will most likely be under his name, “Bill Williams,” or “Williams” indicators.
Unleashing the Power of Fractal Blaster: Key Indicators for Trading Success
Bill Williams Fractals: How to use Fractals in Trading?
Well, These are simply arrows that are on top or below the candles on the chart. These fractals are formed when five repeated bars align in a distinct manner. You need the fifth bar to close to discover the highest high or lowest low. We will go more into detail about this indicator and show you how to use the alligator indicator. You can find the fractal indicator on mt4 or other popular trading platforms. There is no need to have to run a fractal indicator download because it will already be there for you.
Bill Williams Alligator: How does the Bill Williams alligator indicator work? This indicator consists of 3 specific moving averages.
- The 13-period line is called the Jaw (blue)
- The 8-period line is called the teeth (red)
- The 5-period line is called the lips (green)
We will go more into this indicator in a bit. Each of these lines has a specific name. This is because we will reference them later on in the strategy.
Here is what the alligator looks like:
We developed a strategy called the Big Three Trading Strategy that uses three specific moving averages as well if you wanted to check that out later.
These are only two of a total of 5 indicators that Bill Williams developed.
As you can see above, those are all 5 of Bill Williams’ powerful indicators that come standard on your trading platform.
I do like each of these 5 indicators, but after ex\tensive research and testing putting together, the alligator and fractal indicator not only was the easiest way to trade with his indicators but are extremely powerful with the right strategy.
Let’s have a closer look at what is a fractal pattern.
What is a Fractal in Trading?
William’s fractals are reversal swing high and swing low points on a price chart. As stated above, a fractal formation is built by five consecutive candlesticks where:
- The middle candlestick is the highest point
- Or, the middle candlestick is the lowest point
To the left and to the right of the middle candlesticks we have two other candlesticks. Bear in mind that the fractal indicator will display an arrow only above (below) the middle candlestick if it’s the highest or lowest point of the 5 candlestick price formation.
Note* According to Bill Williams’ book Trading Chaos a fractal can also incorporate a 3 candlestick formation where the middle candle is the highest or lowest point of the 3 candles.
As a general rule for a fractal to form you need a minimum of 3 candles.
If you’re a day trader or a scalper you should use a fractal formation built with 3 candlesticks.
Here is an example of a fractal low built up by 3 candles:
However, if you’re a swing trader, we recommend higher settings.
You can use any odd number starting from 5, 7, 9, etc.
Here is an example of a fractal high using 5 candlesticks:
Although, William’s fractals has more to do with visual recognition than with the math behind it, for those who want to know here is how you calculate fractals:
Understanding the Formula Behind Fractal Indicators
The fractal indicator formula contains multiple if conditional statements.
For a fractal swing high we use the following formulas:
- High(N)>High(N−2) and
- High(N)>High(N−1) and
- High(N)>High(N+1) and
For a fractal swing low we use the following formulas:
- Low(N)<Low(N−2) and
- Low(N)<Low(N−1) and
- Low(N)<Low(N+1) and
N represents the high or the low of the current candlestick.
Let’s see how you trade with fractal indicator.
Fractal Trading Made Simple: A Beginner’s Guide to Bill Williams Fractal
The basic fractal trading strategy is very simple. On most trading platforms the fractal arrows that appear above the price action are green and it signals the potential of a swing high being developing. Click To Tweet
In this case, the high of the candle can signal potential resistance.
Conversely, fractal arrows that appear below the price action are red. The red arrow signals the potential of a swing low being developing or an important price level being created.
In this case, the low of the candle can signal potential support.
The fractal trading system really works great at identifying short-term swing highs and lows.
With these trading principles, we have developed a Bill Williams trading system that can signal low risk entry points.
Fractal Trading Strategy Steps: The Fractal Trading Techniques
Step #1: Apply Both Fractals and Bill Williams Alligator Indicator on Your Chart
The First step you are going to want to do is, of course, throw these important indicators on your charts. As I have said, they do come standard on every trading platform that I am aware of so this should be very simple for you to do.
Once you do this your chart will look like this:
Step #2: Trading Fractals Bill Williams: Identify where the Fractal Has Formed (above or below alligator teeth)
Note** In this example we are using a buy trade entry so all of these rules will be for a buy entry.
Ok, so let’s get into what the fractals are all about.
The fractals indicate a bottom or a top. The basic fractal indicator is composed of a very minimum of 5 bars. So when you see a fractal here is what may have happened for it to appear:
- There were a series of at least five successive bars, with the highest high in the middle and then the two lower highs are on both sides.
- There was a reversing series of at least five successive bars when the lowest low is in the middle and the two higher lows were on both sides (which forms a sell fractal)
- Fractals can appear with only one candle to the right of it but be aware that this is an unconfirmed fractal because the price action may pierce through the level. So in order for a fractal to appear and stay on the chart forever, the trader must wait for 2 candles to the right of the fractal.
- The fractals have what’s called a high and a low value. This is indicated by the up or down arrows.
Let’s get into our chart example for this fractal blaster trading strategy.
Above are the unique alligator indicator lines on the chart. Now you need to be aware of where the fractals are being placed on the candles for this strategy concerning this special indicator.
Below is the fractal that we want to take special note of:
I drew a yellow circle on this specific up fractal. This up fractal appeared on this candle ABOVE the red line or the (alligator teeth) This is criteria #1 for the Fractal Blaster strategy.
In a BUY trade, the Fractal must appear on a candle ABOVE the red line (alligator teeth).
What is happening here is that the fractal forms a new high to the previous fractal and therefore made an up fractal appear on the candles.
In order to go to step #2 (for a BUY trade), the fractal must show an up fractal and be appearing above the alligator teeth.
Step #3: The price action must stay above the Alligator Teeth for at least 5 consecutive candles (Buy Trade)
This is where all the magic happens.
More often than not when a fractal appears like the one above, the price action is still “flat”. This means there has not been a real breakout in the recent timeframe. You can also trade with the breakout triangle strategy.
The reason this strategy has to wait for at least five consecutive candles is that this is the time where either there is a pullback that is forming, a reversal may be forming, or the price action is still consolidating in a flat market. Any one of those does not sound pleasant if you are looking for a big upward bullish move to form on the chart.
As you can see, the price action stayed quiet and did not move up or down drastically these five candles. That is exactly what you should see when trading this strategy.
Before we look any further into this strategy, here is what will make the strategy “reset” and invalidate a future trade BUY entry.
- Resets if: A sell fractal appears below the Alligator Teeth line before a position is opened. Like this:
- As you can see if this would have happened in our BUY trade example, then we would have told ourselves that this buy trade is invalidated and we should look elsewhere. The reason is that this could trigger a long Bearish trend which would not be good if you are attempting to go long here.
- Resets if: Any of the two lines of the Alligator indicator have crossed after the identified fractal candle in Step #1. Like this:
Step #4: Price Action Need to Break Above Fractal Candle That was Distinguished in Step #1
Once you see that five consecutive candles did not make a drastic move to the downside and stay in between the high of the fractal candle and the alligator teeth, then we go ahead and make an entry order.
You can make an entry this way, or if you are sitting in front of your charts live with this occurs, then you can make a market order also. Either one is ok to do because the same criteria are needed.
Here is what it will look like:
As you can see, I marked where our original fractal was discovered. What happened after was that there were five or more candles that appeared that did not drift down to the alligator teeth, the alligator lines did not cross, and the price action finally broke above the fractal candle thus triggering a trade.
Take Profit Targets/ Stop Loss
You can try variations to this strategy as far as the take profit and stop loss is concerned.
Exit the trade when two of the alligator lines cross over each other.
This most likely means the alligator is going back to sleep and the price action will either head the other way or consolidate.
This trade would have landed you a 70 pip winner.
Place your stop loss below prior support/ resistance areas. Check out my other article here that talks about these important areas.
This will give you the best opportunity to salvage a trade if the price action would turn on you and turn into a bearish trend. It may “bounce” off these areas and head back in a bullish direction.
The above were the BUY entry criteria. A sell would be the exact same rules only the opposite.
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- Entry Points
- Exit Points
- Risk Managament
- Time Saving Tips
Here are the Steps Of the Fractal Trading Strategy In Action:
How does Fractal Indicator Work – Sell Trade Steps:
- Step #1 Apply Both Fractals and Bill Williams Alligator Indicator on Your Chart
- Step #2 A down fractal must appear below alligator teeth and The price action must stay below the Alligator Teeth for at least 5 consecutive candles.
- Step # 3 Price Action Need to Break Below Fractal Candle That was Distinguished in Step #1
- Step #4 Exit the trade when two of the alligator lines cross over each other.
Final Words – Forex Fractal Trading System
These basic fractal trading techniques should lead you in the right direction if you have been searching for a great strategy to use with these indicators. There are many different strategies you can use with these indicators, but in our experience, we like this combination of the Bill Williams indicators.
Many argue that every indicator is “lagging” and rarely show you profitable entries. The Fractal Trading Strategy uses the combination of price action analysis that complements these great indicators. So if you are one of the sceptics, give this strategy a try and let us know your results. We love hearing your guys’ feedback!
P.S. If you aren’t a believer in an indicator-based strategy, check out our price action pin bar strategy.
Please leave a comment below if you have any questions about Fractal Trading Strategy!
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Thanks for reading!
Frequently Asked Questions
- What is the Fractal Trading Strategy?
The Fractal Trading Strategy is a technical analysis tool that uses Bill Williams Fractals and other indicators to identify trends and potential entry and exit points in the market.
- How do Bill Williams Fractals work?
Bill Williams Fractals are a type of indicator used in theFractal Trading Strategy to identify potential reversal points in the market. They are created by identifying patterns of five bars, where the middle bar has the highest high or lowest low, surrounded by two lower highs and two higher lows.
- What indicators are used in the Fractal Trading Strategy?
The key indicators used in the FractalTrading Strategy include Bill Williams Fractals, Alligator Indicator, Awesome Oscillator, and Acceleration/Deceleration Indicator.
- What are some common mistakes traders make when using the Fractal Trading Strategy?
Some common mistakes traders make when using the Fractal Trading Strategy include using the indicators in isolation, failing to identify the trend correctly, and overtrading.
- Can the Fractal Trading Strategy be used with other trading strategies and indicators?
Yes, the Fractal Trading Strategy can be used in combination with other trading strategies and indicators, such as moving averages, support and resistance levels, and Fibonacci retracements.
- How can traders maximize profits using the Fractal Trading Strategy?
Traders can maximize profits using the Fractal Trading Strategy by using a combination of indicators, identifying trends correctly, confirming signals with other technical analysis tools, and following a well-defined trading plan.
- What trading styles can the Fractal Trading Strategy be used for?
The Fractal Trading Strategy can be used for day trading, swing trading, and long-term investing, depending on the trader’s preferences and goals.
- Can beginners use the Fractal Trading Strategy?
Yes, the Fractal Trading Strategy can be used by traders of all experience levels, but beginners may need to spend more time learning the basics of technical analysis and the indicators used in the strategy.
- What resources are available for further learning and mastering the Fractal Trading Strategy?
There are many resources available for further learning and mastering the Fractal Trading Strategy, including books, online courses, and trading forums.
- What platforms and brokers support the Fractal Trading Strategy?
Many trading platforms and brokers support the Fractal Trading Strategy, including MetaTrader 4 and 5, TradingView, and Interactive Brokers. Traders should research different platforms and brokers to find the one that best fits their needs and preferences.
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