How to Trade with the Fractal Indicator

Fractals are among those indicators that enable traders to detect a pattern in the price movement of their assets. It consists of five candles that are plotted in the candlestick chart and forms when the price makes a recurring movement.
 
Fractals come in two directions: up and down. The up fractal (bearish) has the middle candle pointing upward, whereas the outer hands are pointing downward. It indicates that the price of an asset has reached the highest point and now, it is starting to decline.
 
The middle candle in a down fractal (bullish) is pointing downward, while the outer hands are pointing upward. It shows that the price has reached its lowest point and now, it is starting to increase. These patterns can be symmetrical (perfect) and asymmetrical (imperfect). Traders incorporate fractal trading in order to detect these patterns and then get appropriate signals for buying or selling an asset.
 
Since fractals occur quite often in price fluctuations, traders tend to use this indicator in conjunction with other technical indicators in order to get more precise signals. One of the most popular indicators in this sense is the alligator, which is used to detect the direction of the trend.

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Detecting patterns in price movements - Fractals for beginners

At a glance, price movements on the market seem random and chaotic. They move in a way that cannot be predicted. However, upon close inspection, one can still detect some patterns in those movements that regularly repeat; one can see that on many occasions, price increases are followed by price drops and vice versa and that they have some sort of recurring pattern.
 
There are many indicators in Forex trading platforms that enable traders to discover those patterns. One such indicator is called fractal and while it may seem like a complex mathematical formula, it actually refers to a repeating pattern that occurs in a chaotic world of price fluctuations.
 
The pattern itself consists of five candles charted in a candlestick chart. The commonality between the different types of fractal indicators is that the price pattern looks like an arrow: at some point, the price is increasing, then it reaches its peak and starts to decline; on the flip side, the price is decreasing, then it reaches its peak and starts to increase. By observing these movements, traders can get the idea of when it is best to buy or sell a security.
 
Based on the previous description of patterns, we can outline two main fractal patterns in trading:
 
  • Up fractal (bearish)
  • Down fractal (bullish)
Fractal indicator in trading
The up fractal, also known as the bearish fractal, occurs when the price has been increasing up until some point, then it reached its highest point and finally started to decrease. In a five-candle pattern plotted in a candlestick chart, this pattern can be identified as follows: the middle candle (a turning/reversing point) marks the highest high price in the chart, whereas the two hands on the left and on the right mark lower high prices.
 
The down fractal, also known as the bullish fractal, occurs when the price has been decreasing up until some point, then it reached the lowest price and started to increase once again. The down fractal indicator in the trading chart looks like this: the middle candle of the bullish fractal marks the lowest low price, whereas the two hands on the left and on the right mark the higher low prices.
 
The up and down fractals can be categorized in yet another way. When the outer hands of the pattern are symmetrical to each other, then the fractal is perfect; and when the outer hands don’t align against each other, the fractal is imperfect.


How to use fractals in trading?

Fractals have become incremental to trading, therefore, almost all of the popular trading platforms (MetaTrader 4/5, cTrader, etc.) are offering this indicator without additional installations. In order to toggle the fractals indicator MT4, the user has to go to the Insert menu at the top-right corner, go to the Indicators list, come down to Bill Williams, and select Fractals.
 
Then, the indicator will be added to the selected chart and it will mark all the up/down patterns on it. As for the customizability, traders can choose the color of the arrows, as well as the timeframe.
 
To use an up or down fractal in trading, there is one essential requirement to it: the fifth candle has to close in order for a pattern to be recognized as a fractal. Otherwise, a signal received from the indicator will not be accurate. That’s because, before closing, the fifth candle can take a completely opposite direction and make the fractal disappear from the chart.


Broken fractals

Once all the candles in a fractal are closed, then traders can use the indicator to make decisions. One way of using fractals in Forex, or any other market, is to look for broken fractals. A broken fractal is a pattern that has been confirmed but the next (sixth) candle went higher/lower than the highest/lowest point of the fractal.
 
For example, an up fractal can be considered broken if the next candle immediately after the fractal goes higher than the highest point of the fractal. This pattern suggests that the market is increasing (bullish) and therefore, it can be a good idea to buy an asset (go long).
 
Conversely, a down fractal can be considered broken if the next candle following the fractal goes lower than the lowest point of the fractal. This suggests that the market is declining (bearish) and it can be a good idea to sell an asset (go short).


Coupling with other indicators

When using fractals in actual trading, traders tend to notice one thing: fractals occur quite often in the chart. Therefore, they may not be the most accurate indicators on their own. That is why traders tend to use it in conjunction with other indicators.
 
One of the most popular technical indicators used alongside the fractal indicator is the alligator. The alligator is a trend confirmation indicator that consists of three moving averages. The three average trends can describe the trend movement more accurately and indicate whether it is going up or down.
How to use fractals in trading
Then, traders can use fractals to place a stop loss at a certain price point. For instance, during an uptrend, a trader can place a stop loss at the most recent low of the down fractal. This way, they will continue their long (buy) position as long as the price stays above the stop loss point.
 
For a downtrend, a trader can place a stop loss at the most recent high of the up fractal. This way, they will continue their short (sell) position as long as the price stays below the stop loss point. One additional step traders take to make this combination more accurate is to choose longer timeframes. By doing this, they reduce the number of fractals and make it easier to detect trading opportunities.
 

How to use fractals in trading?

Fractals have become incremental to trading, therefore, almost all of the popular trading platforms (MetaTrader 4/5, cTrader, etc.) are offering this indicator without additional installations. In order to toggle the fractals indicator MT4, the user has to go to the Insert menu at the top-right corner, go to the Indicators list, come down to Bill Williams, and select Fractals.
 
Then, the indicator will be added to the selected chart and it will mark all the up/down patterns on it. As for the customizability, traders can choose the color of the arrows, as well as the timeframe.
 
To use an up or down fractal in trading, there is one essential requirement to it: the fifth candle has to close in order for a pattern to be recognized as a fractal. Otherwise, a signal received from the indicator will not be accurate. That’s because, before closing, the fifth candle can take a completely opposite direction and make the fractal disappear from the chart.


Broken fractals

Once all the candles in a fractal are closed, then traders can use the indicator to make decisions. One way of using fractals in Forex, or any other market, is to look for broken fractals. A broken fractal is a pattern that has been confirmed but the next (sixth) candle went higher/lower than the highest/lowest point of the fractal.
 
For example, an up fractal can be considered broken if the next candle immediately after the fractal goes higher than the highest point of the fractal. This pattern suggests that the market is increasing (bullish) and therefore, it can be a good idea to buy an asset (go long).
 
Conversely, a down fractal can be considered broken if the next candle following the fractal goes lower than the lowest point of the fractal. This suggests that the market is declining (bearish) and it can be a good idea to sell an asset (go short).


Coupling with other indicators

When using fractals in actual trading, traders tend to notice one thing: fractals occur quite often in the chart. Therefore, they may not be the most accurate indicators on their own. That is why traders tend to use it in conjunction with other indicators.
 
One of the most popular technical indicators used alongside the fractal indicator is the alligator. The alligator is a trend confirmation indicator that consists of three moving averages. The three average trends can describe the trend movement more accurately and indicate whether it is going up or down.
Forex trading fractals
Then, traders can use fractals to place a stop loss at a certain price point. For instance, during an uptrend, a trader can place a stop loss at the most recent low of the down fractal. This way, they will continue their long (buy) position as long as the price stays above the stop loss point.
 
For a downtrend, a trader can place a stop loss at the most recent high of the up fractal. This way, they will continue their short (sell) position as long as the price stays below the stop loss point. One additional step traders take to make this combination more accurate is to choose longer timeframes. By doing this, they reduce the number of fractals and make it easier to detect trading opportunities.
 

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Trading with fractals - Key takeaways

In Forex, as well as other trading markets, traders use fractals in order to spot various patterns in price movements. A fractal is a five-candle price pattern that is plotted in the candlestick chart.
 
There are two types of fractal indicators: up (bearish) and down (bullish). When a fractal is bearish, its middle candle (a turning/reversing point) is at the highest point while the outer candles on each side are at a lower point. The opposite is true for the bullish fractal: the middle candle is at the lowest point while the outer candles on each side are at a higher point.
 
Traders can use fractals in several ways. They can look for broken fractals in order to find an opposite pattern of the given fractal (broken up fractal means bullish market/broken down fractal means bearish market) and make relevant trading decisions.
 
They can also couple fractals with other technical indicators like the alligator. With the alligator, traders can detect the overall trend of the market more accurately and then use fractals for stop loss placement.
 

FAQ

1.What are the different types of fractals in Forex?

Fractals consist of five candles and depending on their positions, we can get two types of fractals: up (bearish) and down (bullish).
 
The up fractal, also known as the bearish fractal, has the following structure: its middle candle is at the highest high, whereas the two candles on the right and on the left are at the lower highs. This means that the price has been increasing for a while, then it stopped at its peak and continued in a downward direction.
 
The down fractal, also known as the bullish fractal, looks like this: its middle candle is at the lowest low, whereas the two candles on the sides are at the higher lows. This indicates that the price has been declining, then it stopped at the lowest point and continued in an upward direction.
 
Not only that, but there is also another categorization of the fractals: depending on the positioning of the outer candles, a fractal can be perfect or imperfect. A perfect fractal has symmetrical outer hands, whereas an imperfect fractal doesn’t.


2.Why should I use fractals in Forex trading?

Traders tend to use Forex trading fractals in order to detect certain patterns in price movements and make specific decisions based on them. Judging from the pattern that the fractal is describing, traders can either buy or sell the asset of their liking.
 
For example, they can look for broken fractals in order to spot the opposite price movements of the fractal. For instance, the broken up fractal means that even though the price has started to decline in the last two candles, the next candle immediately after them went even higher than the highest point of that fractal. Therefore, the market is in an uptrend, and traders should probably buy assets.
 
Contrary to that, if the down fractal is broken, the next candle following the fractal has gone lower than the lowest price of the pattern. This means that the market is in a downtrend and traders should probably sell assets.


3.Which trading platforms offer fractals for trading?

Since fractals are among the most popular pattern-detecting indicators, they can be found in the majority of trading platforms.
 
The fractals indicator MT4 can be toggled quite easily. All a trader needs to do is go to the Insert menu at the top-right corner of the screen, select Indicators, come down to Bill Williams, and select Fractals. Then the window will appear where they can choose the color of the indicator, as well as the timeframe.
 
The same process applies to MT5. In cTrader, the simplest way of adding fractals indicator in the chart is to right-click on the chart, coming down to Indicators, and typing “Fractals” in the search.

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