What the Fractal Indicator Tells You

Trading---Fractals

A trader should learn how to anticipate trend changes in the market to make a profit. By making exact predictions, one can earn on the difference in price after it rises or falls. The inability to correctly see or predict trends leads to the loss of assets. Many ways to predict these changes in trends in the market were proposed. One of the most popular is fractals invented by Bill Williams.

What Do Fractals Indicate?

A fractal is an indicator that signifies a local maximum price for some asset or a local minimum:

  • After the highest point has been reached, the trend goes down, so it is profitable to sell your assets at this moment.
  • After the lowest point has been achieved, the price of the asset rises, so it is profitable to buy it at this moment.

How Fractals Are Designated

The entire fractal figure consists of five candlesticks, the middle of which occupies the maximum upper or maximum lower position.

  • An up arrow mark is placed above the middle candlestick if there is a downtrend behind the highest point. Such fractals are called bearish.
  • If there is an uptrend behind the lowest candlestick, a down arrow is placed. Those are bullish fractals.

Possibility to Use a Different Number of Candlesticks for Determining Fractals

However, this model is rather standard. It was adopted by the MetaTrader 4 trading terminal. Bill Williams didn’t assume that fractals should have exactly five candlesticks, so if you determine them manually, pay attention to this. If you wish, you can change the terminal settings and indicate how many candlesticks to include in the fractal. Then, it will automatically show you the specified number of bars. If you have a paired number of candlesticks, the latter low or high will be considered the center of this fractal.

When to Open a Trading Position

According to William Fractals, the signal to open a position is indicated by:

  • a breakout of buyers or an increase in price compared to an up fractal
  • a breakout of sellers or a fall in price compared to a down fractal

However, these trading signals, according to Bill Williams, need to be filtered. The “Alligator” can act as an auxiliary indicator:

  • If you want to open a buy position, you must wait until the fractal that lies above the red line is broken.
  • If a fractal that is below the red line is broken, this is a signal to open a sell position.

When deciding to open a trading position, you must make sure that you really get a fractal pattern. If you hurry, you can make a mistake because another price maneuver may suddenly appear. Therefore, it is necessary to wait until the last candlestick is closed.

Weak Sides of the Fractal Indicator

  • If you use the indicator when forecasting for short-term periods, you can get too many points that indicate highs and lows. Therefore, an inexperienced trader can get confused in all those fractals and will not be able to determine the entry point.
  • Difficulties in depicting fractals in real-time lead to the fact that it depicts signals several candlesticks late. And this means that at the moment when you see the signal, the price may already significantly differ from the signal one.

The Fractal indicator is very effective and worth including in your trading strategy. Its effectiveness is confirmed by the fact that it gives positive results within any timeframe. Still, it may be more reliable with long-term use (more than 500 deals). Ideally, it should be supplemented with a few more indicators for more accurate trend analysis. All of them are also present at the trading terminal MetaTrader 4.

The views expressed in this article are those of the authors and do not necessarily reflect the views or policies of The World Financial Review.