Today’s article will be focused on FRACTALS and how to use fractals for FX trading.
Fractals are a great tool for technical analysis and really enhance your Forex trading plan and FX trading strategies. Fractals are a very useful FX trading tool and technique:
- They provide for a good entry method;
- Yet 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 major levels;
- Fractals can be useful for placement of Fibonacci retracement levels;
- Last but not least: Fractals are a great method of determining the trend (without bias).
Before we explain how to use fractals for FX trading, let me explain you whether you actually use Fractals in your trading? What is your experience so far? Before we go into the practical side of things, let us first take a look at the basics.
The fractal indicator is invented and created by the great trader Bill Williams. Any trader should be able to add the indicator without any problems. For MT 4 users: go to “Insert”, “Indicators”, “Bill Williams”, “Fractals”.
Fractals are strongly connected to either chaos theory or mathematics.
1) In chaos theory the market is fractal in nature:
Fractal in nature means that the market makes same/similar movements on all time frames.
These recurring patterns might seem ad random, but actually have an order to them, which can be explained by the Elliott Wave Theory. In that regard chaos has order in it on a higher scale.
2) 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 exactly the same at every scale.” (source: Wikipedia)
The fractal basically 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, with 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, with the lowest LOW in the middle, and two higher LOWs on both sides, which correlates to the sell fractal;
- The fractals have High and Low values and 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 though:
- On live charts fractals can sometimes appear on the chart with only 1 candle to the right;
- This is actually an unconfirmed fractal and it will disappear from the chart if price pierces through that level;
- Therefore a trader must wait for 2 candles to the right and then the fractal will never ever be removed from the chart.
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, which is sometimes used as a filter.
The standard rule formulated by Bill Williams states that all long trade setups are valid if the fractal is above the “alligator’s teeth” (the center average), and all short trade setups are valid if the fractal is below the “alligator’s teeth” (the center average),
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The Fractal indicator 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 element of doubt what the fractal level is or should be. No, it creates crystal clear horizontal levels and key 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 higher the time frame, 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 2 fractal levels distance instead of 1 would give more breathing space to the trade.
Trend lines and Fibs
Fractals can be also 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”.
Basically Fractals are very easy method of spotting what the trend is on any time frame. All a trader needs to to do is look and see whether the fractals are making higher highs and higher lows or lower lows and lower highs.
Fractals can also be a great Forex tool for placing Fibonacci retracements level. If you are in doubt which swing high or low to Fib, take a look at the fractal and see how your Fib corresponds with the fractal.
Fractals are extremely useful Forex tools. They can provide easy Forex trading and are even good for automated Forex trading software. If you are learning Forex trading, then take a look at the Fractal indicator to get an idea how you can improve your trading.
Thank you all for sharing this information with other traders. We hope that this article has helped you with how to trade the Fractal indicator.
We hope you had a great trading week! And we wish you a fantastic Friday and weekend as well.
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