The Fractal Support and Resistance Indicator was developed by the technical analyst Bill Williams and officially introduced to the market in the early 1990s. This indicator helps traders identify the market trend and use swing highs and lows as support and resistance levels. In an uptrend, the swing points identified by the indicator should generally rise, while in a downtrend, they should fall. The indicator can also be used to determine appropriate trailing stop loss levels based on the trend direction.
How Does the Fractal Support Resistance Indicator Work?
This indicator, which is used to identify the market flow structure, is based on the concept of fractals. A fractal is a repeating pattern that occurs within a larger structure. In the context of this indicator, fractals refer to swing highs and swing lows in the price action of a security.
The indicator uses an algorithm to detect fractals in different time frames, including 1-hour, 4-hour, daily, weekly, and monthly charts. When a fractal is detected above the current price action, the indicator draws a line of resistance. Similarly, when a fractal is detected below the current price action, the indicator draws a line of support. The colors and characteristics of these lines indicate the time frame they are based on. For example, a support or resistance line based on a daily chart fractal may have a different color or appearance than a line based on a monthly chart fractal.
Traders can use the lines of support and resistance identified by this indicator as key levels where the price may break out or reverse. They can also use the characteristics of the swing pattern to identify the direction of the trend. For example, in an uptrend, the swing points should generally rise, while in a downtrend, they should fall. The indicator can also be used to determine appropriate trailing stop loss levels based on the trend direction.
Fractal Support and Resistance Strategy
Buy Signal
- Breakout: Price breaks out from the fractal resistance level
- Reversal: Price bounces from the fractal resistance level
Sell Signal
- Breakout: Price breaks out from the fractal support level
- Reversal: Price bounces from the fractal support level
Fractal Support and Resistance Indicator Pros & Cons
Pros
- This indicator can assist traders in finding possible support and resistance levels in the market.
- It can confirm the strength of a trend and identify potential trend reversals.
Cons
- In market conditions with little trend or direction, this indicator may produce inaccurate signals.
- It may be slow to react to changes in the market due to its reliance on past data.
- It may be affected by significant news events or fundamental factors that influence the market.
Conclusion
The Fractal Support and Resistance Indicator is a technical analysis tool that helps traders identify potential support and resistance levels in the forex market. You can use it to trade breakouts of price or reversals in a range bound market. You will need to have good money management to get the most out of it. I would combine the Fractals indicator with other technical indicators and price action analysis for trade confirmation.
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