How to Trade with the Fractal Indicator

17 November 2023

Fractals are actively used in technical analysis to determine potential price reversals. Fractals are usually used in combination with other indicators and trading systems. Fractals are lagging indicator types, which means that they display what has already happened and make it easier for traders to visualize price action.

There are bullish and bearish fractals. Bearish fractal 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).

Since fractals occur quite often in price fluctuations, traders tend to use this indicator in conjunction with other technical indicators 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.

Detecting patterns in price movements – Fractals for beginners

Technical analysis is focused on finding price patterns that are likely to repeat in the future. The fractal candlestick pattern is one of those patterns. What's more, there's a fractal indicator that can be used to locate fractals. Traders generally use fractals in combination with other indicators.

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 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 increases, then it reaches its peak and starts to decline; on the flip side, the price decreases, then it reaches its peak and starts to increase. By observing these movements, traders can get an 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)

$5-bar-fractals.png$
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 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 reaches the lowest price and starts 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 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 the popular trading platforms (MetaTrader 4/5, cTrader, etc.) are offering this indicator without additional installations. To toggle the Fractals' indicator MT4, the user has to go to the Insert menu in 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 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 an opposite direction and make the fractal disappear from the chart

Broken fractals

Once all the candles in a fractal are closed, 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.

What does fractal mean in trading?

Forex fractals should be used in a context. Keep in mind that the indicator is purely technical, and fundamental factors such as economic announcements and political events can cause the markets to make sharp price jumps. Technical traders always keep an eye on the economic calendar to avoid opening positions just before volatile market conditions. Fractal Forex analysis can be highly useful for scalpers. Scalpers are intraday traders trying to catch price swings. However, fractals can have very little usage for news and fundamental traders, as well as high-frequency traders. Using many indicators simultaneously might seem tempting for novice traders. However, this might be counterproductive. When using lots of indicators, traders are often unable to make trading decisions. When one indicator signals to buy, and the other signals to sell, decision-making becomes complicated. In trading, this is called analysis paralysis. And therefore, if you're planning to use fractals, it's important to use them based on the market conditions.

Trading strategies using Fractals indicator

Bill Williams developed the concept of fractals as a part of his Chaos Theory in trading. The main purpose of Fractals is to identify potential trend reversals, as they are formed when five consecutive bars display a specific pattern.

Fractal Breakout Strategy

Identifying support and resistance levels using fractals is much more objective and ensures traders detect exact levels. Traders can look for breakouts of these levels as a signal for entering a trade in the direction of a breakout. Fractals can help not only detect the breakout but also confirm the validity of the breakout. To increase the success rate, it is recommended to wait for the retesting for the recently broken level and follow the price when it reverses back to the direction of the breakout. ZigZag indicator can also be used as a companion indicator to see breakouts more clearly.

Trend Reversal Method

Many traders use fractals to identify potential reversal points in already-established trends. A series of higher highs and higher lows can be disrupted by a fractal pattern, signaling the possible end of an uptrend. This can be used for anticipating reversals and catching opposite movements. Traders should also look for confirmation from other technical indicators before entering the trade right from the first signal. It is always better to wait for the retesting and only then continue trading with the reversal.

Alligator Indicator Approach

Bill Williams has also developed another popular indicator, Alligator, that incorporates fractals. The indicator consists of three moving averages (called Jaws, Teeth, and Lips), and Fractals help to determine the alignment of the market. So fractals can be considered as a filtering indicator in Alligator. Traders can look for crossovers and divergences between these moving averages to identify potential trend changes and open trading positions accordingly.

Fractal Channels

Traders can also use Fractals for drawing trend lines that form channels. By looking at key support and resistance levels created using Fractal-based channels, traders can buy near the lower channel and sell in proximity to the upper channel. Using other indicators like moving averages can act as a filter for this channel strategy.

Fractals and Fibonacci Retracements

Fractals can make it much easier and clearer to use Fibonacci Retracements correctly. By identifying the upper and lower fractals, traders can draw Fibonacci Retracement and identify potential levels for buying and selling. When a fractal pattern aligns with a Fibonacci level, it can provide a stronger signal for a potential reversal.

Trading with fractals – Key takeaways

In Forex, as well as other trading markets, traders use fractals 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 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.

Frequently Asked Questions on fractals

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.

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.

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 in the top-right corner of the screen, select Indicators, come down to Bill Williams, and select Fractals. Then a 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 a fractals indicator in the chart is to right-click on the chart, come down to Indicators, and type “Fractals” in the search.

How to use fractal indicator in my Forex position?

Since it's one of the most popular trading tools in the market, you can easily find the fractal indicator MT4 already built into the platform. To toggle it on, you need to go to the Insert menu, open the indicators list, expand Bill Williams, and select Fractals.

From that point on, the fractal trade execution is very easy. You can even modify the arrow colors for better visualization. And after that, it's all about reading the patterns and interpreting the data. For a fractal pattern to be considered complete, all five candles should close in the chart; only then can one identify a certain pattern and whether it's there or not.

How to use fractals in Forex trading?

Fractals are used by technical analysts to determine market reversals. However, fractals occur frequently and are not always good at detecting reversals. Which is why it is best to use them in combination with other indicators and trading methods.

How do fractals work in Forex?

Fractals show potential reversals, which is because they display a "U" shape price action. In order to locate fractals easily, there are various technical indicators. You can use built-in fractal indicators or download and install fractal indicators on your platform.

What are fractals in Forex?

Fractal consists of 5 candlestick patterns. There are Up and down fractals. The up fractal is bearish and has a middle candle at the highest point, which indicates that price has been moving upwards, hit the highest point, and started reversing. An up fractal indicates downward reversal, which is why it's called bearish. A down fractal is the opposite of Up fractal. The middle candle is the lowest and resembles a "U" shape. The pattern predicts price reversal upwards, which is why it's considered to be bullish.