A Trader’s Guide to Using Fractals

The fractals revealed listed below are 2 instances of excellent patterns. As soon as the pattern happens, the rate is expected to rise adhering to a favorable fractal, or autumn adhering to a bearish fractal. Fractals could be added to the approach: the trader only takes trades if a fractal reversal happens near the 61.8% retracement, with all the various other problems being met.

Introduction to Fractals

When people hear the word "" fractal, " they usually believe about complex maths. The regulations for determining fractals are as complies with:

The fractals shown below are 2 examples of excellent patterns. When the pattern happens, the cost is expected to climb complying with a bullish fractal, or loss adhering to a bearish fractal. Fractals might be added to the method: the investor only takes professions if a fractal turnaround happens near the 61.8% retracement, with all the other conditions being fulfilled. If going long on a favorable fractal, an investor can exist the setting once a bearish fractal occurs.

  • A bearish turning point occurs when there is a pattern with the highest high in the middle and two lower highs on each side.
  • A bullish turning point occurs when there is a pattern with the lowest low in the middle and two higher lows on each side.

The fractals shown below are two examples of perfect patterns. Note that many other less perfect patterns can occur, but this basic pattern should remain intact for the fractal to be valid.

A Trader's Guide to Using Fractals

The obvious drawback here is that fractals are lagging indicators. A fractal can't be drawn until we are two days into the reversal. However, most significant reversals will continue for more bars, benefiting the trader. Once the pattern occurs, the price is expected to rise following a bullish fractal, or fall following a bearish fractal. (For more, see: Fundamentals of Fractal Markets Theory.)

Applying Fractals to Trading

Most charting platforms now provide fractals as a trading indicator. 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.

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. (See also: Exploring the Williams Alligator Indicator.)

While slightly confusing, a bearish fractal is typically drawn on a chart with an up arrow above it. Bullish fractals are drawn with a down arrow below them. Therefore, if using fractals in an overall uptrend, look for the down fractal arrows (if using a fractal indicator provided in most charting platforms). If looking for bearish fractals to trade in a larger downtrend, look for up fractal arrows.

Sometimes switching to a longer time frame will reduce the number fractal signals, allowing for a cleaner look to the chart, making it easier to spot trading opportunities.

A Trader's Guide to Using Fractals

This system provides entries, but it is up to the trader to control risk. In the case above, the pattern isn't recognized until the price has started to rise off a recent low. Therefore, a stop loss could be placed below a recent low once a trade is a taken. If going short, during a downtrend, a stop loss could be placed above the recent high. This is just one example of where to place a stop loss. 

Another strategy is to use fractals with Fibonacci retracement levels. One of the issues with fractals is which one of the occurrences to trade. And one of the problems with Fibonacci retracement levels is which retracement level to use. By combining the two, it will narrow down the possibilities, since a Fibonacci level will only be traded if a fractal reversal occurs off that level.

Traders also tend to focus on trades at certain Fibonacci ratios. This may vary by trader, but say a trader prefers to take long trades, during a larger uptrend, when the price pulls back to the 61.8% retracement level. Fractals could be added to the strategy: the trader only takes trades if a fractal reversal occurs near the 61.8% retracement, with all the other conditions being met. (For more, see: Strategies for Trading Fibonacci Retracements.)

The chart below shows this in action. The price is in an overall uptrend, and then pulls back. The price forms a bullish fractal reversal near the 0.618 level of the Fibonacci retracement tool. Once the fractal is visible (two days after the low), a long trade is initiated in alignment with the longer-term uptrend.

A Trader's Guide to Using Fractals

Taking profits could also involve the use of fractals. For example, if going long on a bullish fractal, a trader could exist the position once a bearish fractal occurs. Other exits methods could also be used, such as profit targets or a trailing stop loss.

Further Considerations on Using Fractals

Here are a few things to remember when using fractals.

  • They are lagging indicators.
  • Since fractals are very common, they are best combined with other indicators or strategies. They are not to be relied on in isolation.
  • 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.
  • It is best to plot fractals in multiple time frames. For example, only trade short-term fractals in the direction of the long-term ones. As discussed, focus on long trade signals during larger uptrends, and focus on short trade signals during larger downtrends.
  • Most charting platforms now include fractals in the indicator list.

The Bottom Line

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. While some traders may like fractals, others may not. They are not a requirement for successful trading and shouldn't be relied on exclusively. (For additional reading, check out: Using Technical Indicators to Develop Trading Strategies.)

Tip: For investors’ reference only, it does not constitute investment advice. Financial investment products have high risks and are not suitable for every investor. If necessary, please consult a professional consultant.