Majorities of traders are of the opinion that the forex market moves randomly. There are others who think that, price movement may not be entirely random but they follow a specific pattern of trends. One of the most fundamental ways to measure price trend in the forex market is through the use of fractals. Fractals characteristically divide bigger trends into very simple and predictable turnaround patterns. In this guide, we will explain what fractals are and how to incorporate them into your trading strategies to get significant amount of your proceeds. There are a lot of ways to deduce price actions, fractals are only one of these strategies.
What precisely are Fractals?
Mathematically, fractals may be regarded as a disordered and abstract theory that has no physically application. However, the principle of fractals has physical application and can be applied in the market so long as it is a nonlinear and dynamic system. There are yet another group of traders who take fractals literally. For them, fractals are repeating patterns that can be used to forecast turnarounds in the midst of bigger, more disordered price movements.
How to identify fractals
Standard fractals are composed of five or more bars. The rules for discovering fractals are presented below:
- A bearish turnaround that happens when there is a pattern with the highest high in the center and two lower highs on the two sides.
- A bullish turnaround which happens when there is a pattern with the lowest low in the center and two higher lows on either of the two sides.
The fractals illustrated in Figure 1 below are two instances of ideal patterns. Observe that there are varieties of other less ideal patterns that can happen but the fundamental pattern ought to be stay unchanged for the fractal to be viable.
| Figure 1 |
The clear downside of this is that fractals are lagging indicators. This means that, you cannot draw a fractal until two days into the reversal. Although this may be true, most important reversals last numerous additional bars, thus, the majorities of the trend will continue to be unchanged as illustrated in the succeeding examples.
Application of Fractals to forex Trading
Just similar to a lot of trading indicators, fractals are best utilized in combination with other indicators or types of analysis. Possibly, the most common confirmation indicator that is used in combination with fractals is the “Alligator indicator.” The alligator indicator is produced with use of moving averages that make use of fractal geometry. The typical purchase rules valid when the fractal form beneath the “alligator’s teeth” (the middle average), and all sell rules are valid only when the fractals form on top of the alligator’s teeth.
This setup that combines the two indicators is represented below:
| Figure 2 |
In the figure above, the principal drawback to this system is the great swings that occurred. Observe, for instance, that the most recent fractal had a drawdown of more than 100 pips and still has not touched an exit point. Nevertheless, there are myriads of other techniques that can be applied in combination with fractals to create profitable trading systems.
Figure 3 illustrates a forex trading setup that makes use of a unification of fractals (numerous time structures), Fibonacci-based moving averages (positioned at 89, 144, 233, 377 and their reversals) and a momentum indicator.
The figure below illustrates a recent GBP/USD currency pair trade that illustrates the use of fractals indicator to trade:
| Figure 3 |
Below is the rule you need to apply when you are making use of a chart with a four-hour period:
- Launch a position when the price has touched the furthest away Fibonacci band, but just after an occurrence of daily (D1) fractal.
- Exit a trade after a daily (D1) fractal turnaround has occurred.
Observe the way the fractals identify significant tops and bottoms in the figure above. This helps to remove presumption or speculation when choosing the Fibonacci level that is viable to trade. The only thing you need to do is to verify if the daily fractal has happened. Another thing you need to note is that the strength of the trend starts to rise at the sell fractal, and reached its top at the buy fractal. Despite a few pips is lost with the confirmation, it is much preferable because, it prevents us from running into loss by rushing in just by a simple market noise. The 139 pips for sure, are still okay for three days!
Factors to bear in mind when you’re making use of fractals
Below are a few things to bear in mind when you are making use of fractals:
- Fractals are lagging indicators. It is better to use them to confirm that the price action has actually made a turn around. Concurrent tops and bottoms can be deduced with other strategies.
- The longer the length of time which indicates by the number of bars needed for a fractal, the more dependable the price turnaround would be. Nevertheless, you should as well bear in mind that the longer the time period, the lesser the amount of signals produced.
- The best practice is to chart various time frames and utilize them together with one another. For instance, it is advisable to trade short-term fractals in the direction of the long-term ones. Similarly, long-term fractals are more dependable than short-term fractals.
- At all times make use of fractals in combination with other forex indicators or trading methods. They function best as decision support tools, not as standalone forex indicators.
Trading forex with the Fractal indicator
The theory of trading forex through the fractal indicator is more than a mere idea. It helps traders to understand forex price action and trade flows at their most basic level.
SaveA geometric pattern that is repeated at ever smaller scales to produce irregular shapes and surfaces that cannot be represented by classical geometry“The fractal as used here refers to areas of price channelling and consolidation that are being watched by large numbers of forex traders. More importantly, the boundaries of those channels are being watched by the Big Guns in the market, thus forming levels of support and resistance.
In the dictionary fractal is defined as a geometric pattern that repeats itself at increasingly smaller scales to create lopsided shapes and surfaces that cannot be illustrated by standard geometry.
Just like the Fibonacci sequences, it has a physical application in nature, art and as well in forex trading where patterns replicate. Select a pattern on a five-minute forex chart and you will discover the equivalent pattern replicating on higher timeframes, very frequently “nesting” around the same time period on the higher timeframes.
Fractals are created in a trend that the order flows produced by the key market traders fine-tune to a fresh bandwidth or price level. Forex traders will regularly trade the currency pair between the two levels that are being illustrated by the top and bottom of the fractal, until the exterior factors will make the price to rise above the limits of the present fractal. Forex Trading with the use of the Forex fractal is a very rewarding way to trade forex. Forex fractal trading strategies are utilized as blended indicator with other trading analytic tools and they can act as one of the dependable signals that any trader can use to help him to buy and sell forex gainfully.
The forex market is normally stabilized when it is made up of traders or investors that have huge investments. This will make sure that there is sufficient liquidity for the traders. The fractals indicator has more connection with the market sentiment and other technical indicators in the short-term when placed by side by side the longer-term period. If the investments keep on to growing, the longer-term fundamentals will normally dominate. The price alterations will frequently echo the info that is most significant to the investments.
If a trading event occurs that questions the validity of fundamentals, then the long-term investors or traders can end their participation in the trade market or start their trading based on the short-term statistics. If the investment in the forex market comes down to a lower level, then the market will become unsteady. This happens because there are no long-term traders or investors to assist to make the market stable by offering liquidity to short-term trades.
Trade price will exhibit a distinctive amalgamation of short-term trades and long-term basics. The short-term price alterations are much more probably going to be more noticeable than the long-term trades. The major trend in the trading market will indicate the alteration in the fundamentals of the economic area. A number of traders believe that there is no reason to think that the lengths of short-term trends are connected to the long-term ones.
If trade securities are not connected to the trading cycle, then there will not be any long-term trading trends. Trading of the liquidity and the short-term news would normally be the dictating factors. A Fractal is one of the five trading indicators of the Bill Williams trading system, which helps traders to discover the bottom or the top.
Fractal Technical Indicator is a whole series of five bars that are joined with the highest in the center, and two lower highs are located on the two sides. The upend set is a series of five bars, with the lowest lows in the center, and two higher lows located on both sides, which is connected to the sell fractal. The fractals are high and low trade figures and are illustrated with up and down arrows.
Difference between a fractal and a simple price channel
The fractal could be misplaced to be the price channel and to avoid such misconception; we want to take time to explain the difference in this part of the article:
1) A single price channel can easily be identified on a chart, but as soon as you begin to load up fractals on top of one another you’ll start to observe price is in reality becoming fractured and divided in to simpler units along a trend be it bullish or bearish. This is a very robust data given that it shows a sign of the Trend, and
- The extent theprice would go, when it breaks out from a fractal, may rush forward and afterwards retraces back into the body of the fractal. For instance, if every single fractal is averaging roughly 50 pips from the lower edge to the top edge, then if price rises through in any of the two directions, we could anticipate that it oughtn’t to go over 50 pips to start with. This allows us to set stops and take profits with a bit more conviction.
2) As soon as you study the basic features behind the production of price fractals, you observe the market and its price movement dynamics with a bit more clearness. The basics of fractal price movement are engaged in the order of trends that emanates from key financial centers like the banks, trading houses and other key players.
How then do we make use of this statistics, and how can it be reflected on forex charts? We will try to illustrate it with the use of the charts below:
Figure 1: Trading Forex Fractal Trading in Downtrend
The figure 1 above shows fractal indicator represented in a chart when price movement is in the downward trend. In the chart above, we have illustrated three fractals. These are shown with the horizontal white lines.
After price had fallen at the left of the chart it produced a holding pattern and trailed sideways.
There are varieties of basic reasons behind this, but essentially, what has occurred is that sellers have disappeared from the market and price has thus become more stable.
After the formation of this initial fractal price slipped through at the end of the session and this is illustrated by the vertical dotted line. This is very common price action at session switch times. During these times, traders that exit the market clear up their positions. This in this particular instance hassled to more long withdrawals which results to a fall in price.
This is followed by a small break down at the beginning of the innovative session and price found a new level of support at the third white line drawn. Observe that the resistance was produced by the earlier reversal underneath. This previous position of support currently shows a position where sellers are gathered, and while the price reaches that location, it retraces two times ejects as shown by the two white circles in the center of the chart. Depending on all the other standard factors that need to be considered during trading like time of day, confluence and so on, one of these rejections signaled a potential short entry.
The last circle at the right hand side illustrates where price has retraced and cut through the second fractal, but did not succeed to stay inside it. The underside of the second fractal currently becomes the area of resistance where traders are ready to move into the market to make short orders. Their order movements are centered more around the boundaries of this fractal and the new one currently forming.
Basically, what usually occurs as fractals are produced in a trend is that the order movements formed by key market players change to a fresh bandwidth or price amount. The large traders, for whatever reason will start to trade the currency pair between those two levels illustrated by the top and bottom of the fractal, till such time the exterior factors like news outbreak make price to rise above the limits of the present fractal.
The chart below illustrates price action that forms fractals in an uptrend.
Trading Forex through Fractal indicator in Uptrend
With our earlier illustration, chances are that you now are aware of how uncomplicated it is to chart lines that represent the upper and lower boundaries of a fractal.
There is no need for you to physically do this on your charts. It is just for the sake of illustration and as time goes on, you’ll be able to automatically observe them when they present themselves.
The first circle illustrates the position where price after breaking out of the first fractal (and, fascinatingly, rising a distance almost equal to the bandwidth of the earlier fractal, and add a little bit more) goes back over and retraces from the upper level of the fractal it immediately exited from.
The last two circles illustrate related price movement into an increasingly more bullish trend. As the price movement in the upwards direction increase the bandwidth of each succeeding fractal extends a bit.
Ways to trade fractals
There are two key ways to trade the fractal. These are the Slip Through and the Retest.
- To trade with the Slip Through, wait for a robust, rather blunt-ended candle to close above the border line of the present fractal. Place a border order immediately before price, with a stop merely at the back the other frontier of the fractal. This offers you a stop loss of the width of the fractal, and that is normally a great position for your stop to reach.
- To trade with the Retest, don’t trade till price rises above a fractal boundary. This implies a Slip Through and retraces to retest the fractal frontier it immediately broke away from. Make sure that it rejects from this level in the direction that it moved when it rose far away from the fractal. Yet again, positioned your stop on the opposite part of the fractal. This means away from the furthest away fractal boundary.
Conclusion
Fractals can be enormously influential tools when utilized in combination of other indicators and techniques, particularly when utilized to corroborate reversals. However, just like you’d do with every other form of strategy, ensure you use the signals with other signals and statistics to help you during your trade decisions.