Forex Fractals strategy - ForexProp

What are Forex fractals and how to trade fractals in forex?

Fractals in forex: principles, types, rules of construction. Advantages and disadvantages of using forex fractals strategy. A practical example of forex trading based on fractals.

In math,  fractals are infinitely complex patterns that are self-similar across different scales. Each part of this pattern repeats the whole formation. In trading, fractals are indicators on candlestick charts that identify reversal points in the market.
 


A fractal is a pattern that is a price extreme featured in the period of five and more candlesticks. It is used as a confirming signal for taking a trading decision. Based on the pattern, Bill Williams designed the indicator. From this article, you will learn how to employ fractals in complex forex trading strategies explained on practical examples.

A beginner’s guide to trading fractals. Basic rules, features, and forex fractal strategies with real examples.

Fractal, in my opinion, is one of the most useful patterns that quite accurately signals a local trend reversal. Even if, in the real market, perfectly symmetrical construction of fractal candles is rare, beginner traders discover this pattern one of the first - it catches your eye almost immediately.

It is remarkable that this term was the first introduced as a trading term by Bill Williams, but he used it incorrectly. It has nothing to do with the mathematical theory of fractals, it is rather a common price high or low used to enter the trades in trend during the correction.

Read this article on and you will learn:
 

  •  What fractals mean in trading, their advantages and disadvantages.
     
  •  How you can be built complex forex trading strategies based on fractal patterns. 
     

You will also see practical examples of how you can employ forex trading strategies based on fractals and fractals indicators.

What is a fractal in trading and how to develop a trading strategy based on fractals?

A fractal is a pattern composed of five or more closed bars, where the middle bar is the highest high/lowest low compared to the bars on both sides. The bars must be closed, as there may be a price movement in the fifth bar that could mark a new extreme.

The difference between the price rise on the left of the fractal bar (momentum) and the price decline on the right (pullback) is called a lever. If the price at the moment of closing of the last bar returns to the level of the pattern beginning (the level of the first bar), the lever is equal to zero, and the fractal is complete.

trading, the market concept of fractals forming on the price chart is like this: traders enter trades in the trend and push the price up. At some point, there are no more buyers as everyone, who wanted to buy, has already opened their positions, that is how the fractal bar forms. Next, the price rolls back. The most impatient traders are exiting their trades; afterward, the price is going up again, and, after the balance point is passed, there forms a new fractal. 
 

Special features of fractals trading. 
 

  • Each new fractal with insignificant pullbacks is considered a confirmation of the major trend and can be used for increasing the position volume.
     
  • Analysis of the so-called "fractal dimension", you start from a longer time interval and go on to a shorter one. For example, if a fractal is formed on a daily timeframe, then the fractal is likely to form on a shorter timeframe (confirmation signal). For a detailed analysis, I recommend using the Mini chart indicator which may display up to 60 charts for timeframes and different assets in the main window. 
     
  • You can build price channels and support/resistance levels based on fractals. I will describe an example of such a strategy later.
     

Problems of trading fractals 
 

  • Fractal signals are not regular or exact. It is thought that it is better to trade forex fractals strategies in the flat when there are no price sharp swings and the market is relatively calm and wave-like. There are also trend strategies; if the first extreme is followed by another extreme after the pullback, it may signal the level breakout. 
     
  • Lagging. The formation is considered complete only after two more bars close following the last fractal bar. That is why the pattern is used as a supplementary tool, confirming the signal, but not as the primary one.
     
  • True or false. This issue causes most of the problems. The less the pattern looks like a standard one, the more doubts it should arouse. The shorter is the timeframe, the more there are extremes that may be false. The problem is partially solved by the analysis of the pattern during seven and more bars, but such explicit patterns are extremely rare.
     

The fractals indicator itself is only an information indicator. It is most commonly combined with the Alligator (also developed by Bill Williams) and with Fibonacci levels.

The most popular strategy is using pending orders in a strategy based on the breakout of the level built according to at least three fractal peaks. Continue reading with Litefinance.com...


 

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