Fractals is one of the most popular and widely used trend defining indicators. Fractals is a lagging indicator. It is also used to find a reversal point of a large trend. Fractal is one of the essential indicators of Bill William’s chaos theory.
Why fractals came up in forex?
Though prices are random, for technical analysis market follows a pattern and in its way, market always tries to create a trend. By using fractal indicator you can break a large trend into a simple predictable reversal patterns.
Fractals needs at least five successive bars. For a up fractal or bearish fractal the highest High will be in the middle and two lower Highs in both sides. For down fractal or bullish fractal same thing will be in consideration but will be Reversing. Lowest Low will be in the middle for down fractal.
You might be confused when we tall the up fractal as a bearish fractal. The thing is we call the up fractal as a bearish fractal because fractal works in a reversal way. In a down trend to go for a short entry you have to wait to create an up fractal and this up fractal is the indication of going downside and that is why we are call it as a bearish fractal. Same thing happens for the down fractal or bullish fractal.
The best way to use fractal is with Bill William’s Alligator indicator. The combination of Alligator indicator and fractal indicator might give a better result in your trading.
In Alligator indicator we have three moving averages. One is green that is leap of the alligator, red moving average is the teeth and the blue one is the jaw of the alligator. This is a very easy trend defining indicator to get a long trend (up alligator) we need a setup in which leap will be over teeth and jaw and teeth will be in the middle of leap and jaw. For a short trend (down alligator) jaw line will be in the top then the teeth and then the leap.
Long entry by using fractal
First we have to find an up alligator. Our entry will be the close of the 5th bar of the fractal. We must have to wait till the closing of the 5th bar and entry must be at the beginning of the next bar.
In the snap shot below you can see two consecutive long entry. You will make your at the beginning of a candle and that candle must be opened above the leap or teeth of alligator for a long entry. If candle opening is below the jaw then you should be aware of a false signal. The stop loss will be just below the peak of the last down fractal.
The exit of your long entry will be either a hit of your stop loss or candle close below teeth or jaw.