What are Fractals?

Talking about Fractals, many people think of concepts of mathematics, they think of "chaos theory" and other mathematical theories. Although these concepts apply to markets (it's a dynamic, non-linear system), most traders refer to fractals in the simpler sense. That is, see fractals as repeating patterns that can predict reversals between big and turbulent price movements.

These basic fractals consist of five or more candles. The rules for defining fractals are as follows:
  • Bearish fractal (bearish fractals) is the middle highest point in a series of 5 candles
  • Bullish fractal (upward fractals) is the middle lowest point in a series of 5 candles.

The fractals shown in the figure above are two examples of perfect patterns. Note that less perfect patterns can also happen, the underlying models should follow the rules for fractals to be highly accurate.

The obvious downside here is that fractals are lagging indicators - that is, a fractal cannot be formed until we confirm a reversal pattern occurs after 2 candles. While this may be true, most reversals take place in more candles, so the trend will be held for longer (as we will see in the example below).

How to use Fractals in trading

Like trading indicators, Fractals work well when combined with other indicators, but perhaps the most common one is to use the "Alligator indicator" tool as a filter - a tool made up of MAs. .

The rule here is that buy signals appear below Alligator's teeth and sell signals appear above Alligator's teeth.


As you can see, the main disadvantage of this system is when a large price movement occurs large volatility occurs. For example, in the above case, the fractal gives false signals and causes loss of more than 100 pips without returning to the zone The trader can exit the order. However, there are countless other techniques that can be used in conjunction with fractals to create profitable trading systems.

The next picture shows a trading setup using a combination of fractals, with the MA series following the Fibonacci sequence (that is MA 89, MA 144, MA 233, MA 377) and the momentum indicator (momentum indicator). . Take a look at the recent trade setup for the GBP / USD currency pair to see how fractals work:


Here is a trading rule implemented on the H4 framework:
  • Start trading when the price touches the farthest Fibonacci band, but only when a fractal daily forms.
  • Exit the order when fractal daily signals a reversal to form.
Do you see fractals that determine reversals very well from top to bottom? This helps you to guess which Fibonacci zone to trade - all we have to do is check when the daily fractals occur. bearish fractals and stop at bullish fractals. Even though we lose a few pips waiting for confirmation it will keep us away from the noisy signals of the market - earning 139 pips is definitely not too bad holding the position for over 3 days.

Things to keep in mind when using Fractals

They are a lagging indicator. They work best when used as a reversal confirmation tool. The timing of the top and bottom can be predicted by combining other techniques.

The longer intervals (i.e. the number of candles needed for a fractal) the more reliable reversal is. However, you should also keep in mind that the longer the interval time, the less the number of signals.

It's best to draw fractals over multiple timeframes and use them together. For example, trade only fractals on short timeframes and in the direction of fractals over longer timeframes. Long-term fractals are more reliable than short-term fractals.

Always use fractals in combination with other indicators or with a certain system. It is an aid, not a determination.

Conclude

As you can see, fractals can be incredibly powerful when used in conjunction with other indicators and techniques, especially when used for reversal confirmation. The most common usage is with the "Alligator indicator"; however, there are other uses as well, as we have seen here.

Overall, fractals are a great decision aid for any kind of trading.