Traders and investors use tons of patterns, indicators, and strategies to conquer the market, but we are unsure which are worth using. Nevertheless, out of so many price and candlestick patterns, we have fractals that are continuous price patterns used to identify reversals on the chart. Now, if you have started reading this article already, that means you are interested in knowing what we have for you, how these fractals actually work, and how it will benefit you.
If yes, then read this article and understand all the questions you have regarding fractals and how to use them. Price representations through candlesticks would remain quite random until you try to find the meaning through your analysis. If you have been trading forex regularly, you would have noticed that the price creates certain patterns over time.
To the novice chart analyst, the prices may appear random; however, the market makes repeating patterns that can be beneficial if you have a good piece of trading knowledge and experience. A fractal refers to a reversal pattern on a price chart that consists of five or more candlesticks.
In simpler words, you can understand it as a repeated occurrence of price patterns on every time frame. A reversal pattern can be the start of a bearish or bullish trend. Therefore, fractals can indicate bearish or bullish turning points.
These examples are perfect patterns, but traders should note that the market patterns can be slightly different; however, the basic rules will validate the trend. There are also a few trend indicators that you can use to validate your trade. The objective of using fractals is to benefit when the market is trending because during consolidation, there is no trend, and using fractals would not be profitable.
The fractal strategy was initially developed for the stock market because it had less volatility and high predictability. Institutional traders use fractal strategies proving that the indicator is reliable and can have high success rates if applied correctly.
Instead, there is a fraction indicator that you can easily apply to your price chart and use it. One important point to note while using fractal indicator is that it lags, and you cannot draw fractal until we are two days into the reversal. Nevertheless, the most significant reversals will continue for more bars, benefiting the trader.
Once the pattern occurs, the price is expected to rise following a bullish fractal or fall following a bearish fractal. Using fractals seems straightforward; however, there are specific rules to follow to ensure that you become consistent. Trading fractals with other indicators is a popular strategy that many traders use.
We will discuss bullish and bearish strategies that you can learn using fractals. When the fractal appears, as in the above chart, it means at least five candlesticks are forming the reversal pattern. We have to add two indicators to our price chart, the Williams fractals and the Bill Williams alligator indicator. You can find both indicators in the TradingView indicator panel.
Step 2: For a buy trade, the fractal must appear on top of a candle that formed above the redline alligator teeth. Step 3: The price has to be above the red line for five consecutive candlesticks. Furthermore, you would want to see a consolidation after the fractal formed, which means the price remains flat.
Step 4: The price has to break above the fractal that we highlighted to make a buy entry. Although price movement can appear random — an ongoing debate among academics — repeating patterns and trends appear visible in the financial markets, across all asset classes. One of the most basic repeating patterns is a fractal. As illustrated in figure 1. Note other less perfect patterns can occur, whereby the pattern forms an irregular V shape, though basic structure should remain intact.
Several trading strategies exist based on fractals, each with specific rules of engagement. For example, some traders favour fractals as a means of confirmation, such as at areas of support or resistance, supply or demand and trend lines. It is also worth noting fractals are lagging indicators.
Figure 1. Most trading platforms offer fractals in the form of a trading indicator. The application highlights fractal patterns formed in the market, saving the trader valuable time. Bill Williams is an American trader and author of books on trading psychology, technical analysis and chaos theory. As visible from the H1 chart depicted in figure 1. A bearish fractal a down fractal forms an upward facing arrow , whereas bullish fractals an up fractal generate downward facing arrows.
Another method of filtering fractal signals is by syncing additional technical indicators. A common indicator used for confirmation is the Alligator indicator. Also developed by Bill Williams, the Alligator indicator uses three smoothed moving averages, set at five, eight and thirteen periods.
The initial smoothed average computes using a simple moving average SMA , adding additional smoothed averages that slow down indicator turns. Instead of applying additional indicators, traders may choose to learn how to identify a trending market. A market trending lower, on the other hand, generates lower lows and lower highs. While a plethora of price-based techniques are available, the following two approaches are ideal for beginner traders.
Like all technically-based methods, however, losses WILL occur. Nevertheless, after learning how to accurately select support and resistance levels, executing fractal signals off these barriers certainly places the odds in your favour.
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