As a rule of thumb, about 75-80% of the time, the foreign exchange market is in a flat state or, what they call this phenomenon, in a state of consolidation. Only 20% of the time the price moves significantly in what could be considered a trending direction. How to determine the limits of consolidation and moments when the price moves from the consolidation stage to the trend stage? The fractal indicator can help you with this – one of the five unique technical indicators of Bill Williams, that are rightfully revolutionary in the field of online trading and technical analysis. A description related to the specifics of the operation of the Fractals indicator can be found within this article.
What is the Fractals indicator?
The specificity of the fractal indicator is quite simple. There are two types of fractals:
- lower fractal
- upper fractal
These fractals are determined by analyzing a series of 5 candles, among which the indicator determines the highest (upper fractal) or the lowest (lower fractal). Ideally, it looks like this:
However, on the market, you rarely see formations that resemble such ideal options. In reality, there are many other variations in which fractals are formed:
The most important thing you should know is that a fractal indicator determines for us nothing more than local low and high, breakdowns of which are usually associated with local changes in trends, and it works without repainting. Whereas, in the Bill Williams strategy itself, the breakdown of a fractal maximum or minimum is the starting point for entering the market.
It should be noted that the fractal signal about the formation of a new local low or high on the chart is two candles late. Since, according to the calculation formula of this technical indicator, to determine the highest of the five candles, the indicator analyzes the mutual construction of the first two, mid, and the last two candles. If the middle candle is higher than four candles in this row, the fractal indicator “draws” an up arrow above it. Accordingly, if the middle candle is lower than the other four, a down arrow appears under it.
As we mentioned above, when the fractal arrow appears above or below the candles, it is most likely too late to enter these signals, since the price may have already moved far away from the optimal level to enter the market.
In this way, the fractal signal has value in its application with other technical indicators. On the other hand, if the fractal level appears on the price chart, it will no longer be redrawn.
How to use the Fractals indicator?
The fractals indicator is included in any standard trading platform, including the popular MetaTrader 4 (MT4) terminal. To apply this indicator to the forex currency pair charts, you need to click on the “indicators” button on the main bar of the MT4 platform, select the subsection “Bill Williams Indicators” and click on the name of the “Fractals” indicator:
After that, fractals will automatically appear on the quote chart, the calculation of which is carried out according to the algorithm described above:
Fractals indicator forex strategy
To begin with, Forex fractals indicator is a universal tool, commonly used for part of the technical analysis element of a forex trading strategy.
For example, fractals can be used for:
Identifying possible support and resistance levels which is applicable to any “breakout or reversal” trading strategy. In this case, the moment to conclude the transaction will be the closing of the breakout candle above/below the levels constructed using fractals.
As a target for Take Profit, you could use the nearest fractal level. Whereas Stop Loss could be set at the level of the previous fractal.
Let’s look at the buy setup using fractals:
The Bill Williams fractal indicator can be used as target points for connecting trend lines. As we know, fractals can define local lows and highs. Whereas, it is customary to draw trend lines through such points.
According to the rules of technical analysis, during a bull trend, upper fractals are more often updated, and during a bearish trend, lower fractals are updated:
If the price has not been able to overcome the previous fractal for some time, this can be the first signal of a change in trend direction or the beginning of a price consolidation period, that is, a flat period. This is frequently referred to as a ranging market.
How to filter Fractal signals?
So far, there are no exceptions to the rules and technical indicators that would give the trader 100% unambiguous and accurate signals. With all its unique properties, fractals like any other technical indicator can give false signals.
At the same time, given the huge number of fractals that appear on the quote chart, false signals can occur quite often. Therefore, using fractals in technical analysis and trading, it is important to learn how to filter their false signals.
For example, the creator of the Fractals indicator, Bill Williams, recommends another of his indicators as a filter, namely the Alligator (you can also find it in the standard set of MT4 indicators next to the fractals).
The Alligator shows the trend (the indicator lines are parallel to each other), the moments of the trend change, and the flat sections (interlacing of the indicator lines).
Thus, the simultaneous use of these indicators can allow you to conclude transactions using fractals only in the direction of the overall trend, at the same time, filtering out flat areas.
A few rules for using Fractals
And finally, a few simple rules that may come in handy when using fractals:
- Fractal is a lagging indicator, and its use brings the best result when used together with other technical indicators from MT4 and additional market analysis methodologies.
- The higher the time frame on which you use fractals, the more accurate the signals can be as there is less market noise.
- The fractal signal is most relevant until a new fractal appears on the quote chart. If you set the “delayer” to the fractal level, and a new fractal appears on the price chart, we may refer to the level of the new fractal.
Fractals indicator conclusion
Fractals is a classic indicator that can help traders in analyzing the markets in various ways. However, like any other indicator, Fractals is a lagging indicator that may come up with many false signals. Therefore, it is prudent to follow the rules and take confirmation from other indicators before entering a trade.
The methods of implementing fractals into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.
Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.
If you would like to practice trading with fractals, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.