Simple and versatile, fractals can be used as a stand-alone indicator or in combination with other Forex indicators.
The basics of Fractals indicator
Fractals point tops and bottoms where market reverses.In order for a fractal to form, there should be a series of 5 consecutive bars where the middle bar will be the highest preceded and followed by two lower neighboring bars on each side:- a Buy fractal forms at the top of the price wave with the Highest High in the middle and two Lower highs on each side;
- a Sell fractal forms at the bottom of the price wave with the Lowest Low in the middle and two Higher Lows on each side;
Buy and Sell fractals may share price bars (e.g. use the same bars from the set of 5).
How to trade with Fractals
Setting a trade at the breakout point is an obvious and simplest application of the Fractals indicator.
Fractals as trend line connecting points
fractals could give some advantage to Forex traders since other market participants might also be using the same obvious price points for drawing trend lines.Fractals indicator makes it easy to identify and connect the most significant tops and bottoms needed to draw a trend line. Drawing trend lines using
Fractals as trend confirmation
As trend (up or down) progresses a successive break and advance of new fractals will be seen. Should the break of the previous fractal fail, we get a first sign of price consolidation.
In an uptrend we will witness that there are more up fractals broken than down fractals. In a downtrend there will be more down fractals broken.
Fractals for trend consolidation
Failure to successfully advance past previous fractal puts price on a consolidation path. To avoid an immediate coiling price will attempt to break at the opposite fractal. Should this move also fail to bring results, traders should prepare for a ranging market period till a new successful breakout
Fractals trading: Bill Williams' Chaos Theory
Fractals indicator is one of five indicators of Bill Williams’ trading system. According to his system, Fractals have to be filtered with the help of Alligator Indicator
Fractals should be traded the following way:
• If a Buy fractal is above the Alligator's teeth (red Alligator line) traders should place a pending Buy order few points above the high of the buy fractal;• Don’t take any Buy positions if a fractal is formed below the Alligator's teeth.
• Don’t take any Sell positions if a fractal is formed above the Alligator's teeth.
Such signaling fractals remain valid till a pending entry order is triggered or a new valid fractal is formed (a position will then be re-set according with the new fractal). Consecutive fractals going in the same direction that are formed after the first order if triggered can be used to add on to an open trade.