Fractals are tools of technical analysis developed by successful trader B.Williams. Unlike other forex indicators, they are drawn as simple arrows in currency chart, pointing at the top/bottom of five candles formation.
Fundamentally, however, they break down very complex and chaotic structure of price movement into smaller waves. As such, they can help us to find some order and structure in forex market.
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Structure of fractal formations
Bearish fractal – 5 Candle formation. Fractal marks candle with the highest high. Candle is surrounded by two candles with lower highs on each side.
Bullish fractal – 5 Candle formation. Fractal marks candle with the lowest low. Candle is surrounded by two candles with higher lows on each side.
To confirm the fractal, last fifth candle of the formation needs to be closed. Despite lagging, most reverse formation lasts longer than two candles and indicator has even more uses.
Using fractals in forex trading
As with most of the indicators, fractals are also best to be used together with other indicators and/or tools of forex analysis.
MACD, Alligator, Envelopes, Moving averages for trend identification
CCI, Force index, Stochastic, DeMarker for position entry confirmation
Fractals can be used for determining stop loss and take profit levels. Placing stop loss at previous swing up/high is a common practice. By using fractals to do so, we can simplify the process and avoid errors.
Fractals can help to detect price formations. Even for experienced technical trader, it may be difficult to find tradeable chart formations on forex. Fractals can help to recognise patterns and simplify the set of rules for position entry and exit. This makes easier for us to backtest our strategy and optimise algorithms.