The word “fractal” is from complex mathematics, where it is used it to extend the concept of theoretical fractional dimensions to geometric patterns in nature.
We are going to discuss how to use fractals in trading where refer to a recurring pattern that occurs amid larger more chaotic price movements. The word “fractal” means “broken” or “fractured”. As a trading tool, fractals indicator was introduced by Bill Williams, a creator of Alligator indicator. The Williams Fractal is an indicator aims to detect reversal points (highs and lows) and marks them with arrows. Up fractals and down fractals have specific shapes. The Williams Fractal indicator helps users determine in which direction price will develop. Williams recommends using Alligator and Fractals indicators together. A long signal would be if the fractal is above the alligator’s teeth and a short signal would be if the fractal is below the alligator’s teeth.
Fractals indicator comes standard on our trading platform Quotex Terminal There is no need to have to run a fractal indicator download because it will already be there for you.
The first step you are going to want to do is, of course, throw these important indicators on your charts.
This means traders don’t need to hunt for the pattern. Apply the indicator to the chart, and the software will highlight all the patterns. Upon doing this, traders will notice an immediate problem: this pattern occurs frequently.
Appearance and setting
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:
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.
How to use Fractals?
This is where all the magic happens. Fractals are best used in conjunction with other indicators or forms of analysis. A common confirmation indicator used with fractals is the alligator. It’s a tool created by using multiple moving averages. On the chart below is a long-term uptrend with the price staying predominantly above the alligator’s teeth (middle moving average). Since the trend is up, bullish signals could be used to generate buy signals. The system provides entries, but it is up to the trader to control risk.
Fractals should not be used alone for trading system or strategy. It is recommended to use it in combination with other indicators, oscillators and tools.
- Firstly, the many fractals into single direction indicate the strength of the trend. In other words, “arrows” give you a reference point on which you can open positions.
- Secondly, the indicator is great for peaks. Therefore, paying attention to the fractals, you can identify double tops, double bottom, head and shoulders, etc.
- Thirdly, fractal may indicate a reversal of the current trend.
Trading on Fractal Strategy
Even though it is not recommended to use fractals alone some traders apply it for turbo regime to buy a large number of contracts with a minimum expiration period.
The strategy is simple:
- The CALL option is bought if the price exceeds the last up fractal.
- The PUT option, on the contrary, must be bought when the price falls below the last lower fractal.
The expiration period is minimum – the time of formation of one candle.
Trade short-term fractals in the direction of the long-term ones. Focus on long trade signals during larger uptrends and focus on short trade signals during larger downtrends.
More Recommendations on Fractals:
- Fractals are best combined with other indicators or strategies. They are not to be relied on in isolation.
- Fractals are lagging indicators.
- The longer the time period of the chart, the more reliable the reversal. It’s also important to note that the longer the time period, the lower the number of signals generated.
- Plot fractals in multiple time frames.
Fractals may be useful tools when used in conjunction with other indicators and techniques. Fractals can be used in many different ways, and each trader may find their own variation. Using an alligator indicator is one option, and another is using Fibonacci retracement levels.