FRACTALS and how to trade the fractal indicator
Fractals are a great tool for technical analysis and enhance your Forex trading plan and FX trading strategies. Fractals are a very useful FX trading tool and technique:
- They provide for a safe entry method
- Even more important; they also provide places for great stop losses
- Fractals are natural support and resistance levels
- Fractals on higher time frames can be/spot significant levels
- Fractals can be useful for placement of Fibonacci retracement levels
- Fractals are an excellent method of determining the trend (without bias)
Before explaining how to use fractals for FX trading, ask yourself a few questions. Do you use Fractals in your trading? What is your experience with this method? Before we get into the practical side, let's learn the basics first. You can also trade with the best ADX Strategy.
The fractal indicator was created by a great trader, Bill Williams. All traders should be able to add the indicator without any issues. For MT 4 users, go to “Insert,” “Indicators”, “Bill Williams,” “Fractals.
- Fractals base on either chaos theory or mathematics.
In chaos theory, the market is fractal in nature:
Fractal, in nature, means that the market makes the same or similar movements on all time frames.
These recurring patterns seem random, but they do have an order to them. This is explained by the Elliott Wave Theory. In simpler terms, chaos has order in it on a higher scale.
- The mathematical definition of a fractal also says something similar:
“Fractals are typically self-similar patterns, where self-similar means they are “the same from near as from far. Fractals may be the same at every scale.” (Source: Wikipedia).
The fractal indicates a bottom or top. The basic fractal indicator is composed of a minimum of 5 bars. The fractal qualifies when this happens:
- The Fractal Technical Indicator it is a series of at least five successive bars. The highest HIGH in the middle, and two lower HIGHs on both sides.
- The reversing set is a series of at least five successive bars. The lowest LOW in the midst, and two higher LOWs on both sides, which correlates to the sell fractal.
- The fractals have High and Low values. They are indicated with the up and down arrows.
See the chart example for up and down fractals.
Fractals will automatically appear on a trader’s chart if they choose the fractal indicator. A word of caution is:
- On live charts fractals can appear on the chart with one candle to the right.
- A fractal with one candle to the right of it is an unconfirmed fractal. It will disappear from the chart if price pierces through that level;.
- Therefore a trader must wait for two candles to the right. Then the fractal will always appear on the chart.
The Purpose of Using Fractal Indicators
Supported by chaos theory and other mathematical principles, the purpose of using fractal indicators is to identify when these break outs have actually begun to occur.
When viewing fractal indicators on trading charts, your goal will be to identify if the indicators are “broken.” Once the existence of a fractal (pattern) is confirmed, there should be a definitive range that prices can be expected to move within. The process of “breaking” involves prices moving either above, or below, what the fractal indicator predicts.
If prices break out through the higher end of the pattern (an “up” fractal), then the market can be considered to be moving upward. When prices break out through the lower end, the market will be moving downward. Fractal indicators help identify whether a price is moving chaotically or a trend has actually reversed.
Use of fractals in strategy
Many traders use Bill William’s indicator in cooperation with other Bill William’s indicators. One of the most used indicators in combinations is the Alligator indicator (or William's Alligator).
The standard rule formulated by trading fractals Bill Williams states that all long trade setups are valid if the fractal is above the “alligator’s teeth” (the center average). And when all short trade setups are correct if the fractal is below the “alligator’s teeth” (the center average).
If you want to seek more free Forex advice and currency trading tips, then please look at these links:
- Completing The Fractal-Based Trailing Stop Logic
- Defining Our Fractal-Based Trailing Stop EA
- More Fractal Examples and Casey’s Call On The GBP/USD
A fractal indicator formula is a great tool in any trader’s Forex tool box. One of the reasons why this is such a great item for any Forex trading system is because the indicator has clearly defined rules. There is not the element of the doubt what the fractal level is or should be. No, it creates crystal clear horizontal levels and critical support and resistance levels.
Here are some extra Forex tips and words of caution as well when using the Fractal indicator.
- The higher the time frame, the more importance and reliability can be subscribed to any fractal
- The larger the period, the lower the number of signals generated
- Plotting and analyzing fractals in multiple time frames is very useful. The long–term chart can be a great filter for short-term fractals
- Fractals can be great to use for trail stops. The trail stops can, in fact, be used on all time frames, but they have more value or strength on higher time frames. Using two fractal levels distance instead of 1 would give more breathing space to the trade.
Trend lines and Fibs
Fractals can also be a very useful tool for drawing trend lines. If you are having difficulties with placing the correct lines, then fractals can be a great support tool. Please read more in this article about “Trend Line Drawing With Fractals.”
Fractals are the very easy method of spotting what the trend is in any time frame. All a trader needs to do is look and see whether the fractals are making higher highs and higher lows. Or, on the other hand, lower lows and lower highs.
Fractal forms can also be a great Forex tool for placing Fibonacci retracements levels. If you are in doubt which swings high or low to Fib, take a look at the fractal. See how your Fib corresponds with the fractal.
Fractals are extremely useful Forex tools. They can provide smooth Forex trading and are even suitable for automated Forex trading software. If you are learning Forex trading, then take a look at the Fractal indicator. This will give you an idea for how to improve your trading.
Thank you all for sharing this information with other traders. We hope this article helped teach you how to trade the Fractal indicator. For additional information, read, Scaling in and Scaling out in Forex.
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