Many people contend that although prices may seem random, they follow a pattern in the shape of trends, while many others counter that although prices may appear to be random, they do not form any trends. Fractals come into play in such situations because it’s the simplest method by which traders can spot these trends. Larger trends are effectively broken down by fractals into incredibly straightforward and predictable reversal patterns. Many people think of chaos theory and abstract mathematics when they consider fractals in the context of mathematics.
A fractal indicator is a trading tool used in technical analysis to spot possible market turning points for trends. It is also known as the Williams Fractal Indicator because it was created by famed trader Bill Williams.
Fractal trading is only one of the evaluation methods which is effective during periods of a stable trend, while in a wide flat can be unprofitable. It is critical to realize that fractal trading strategies were initially created for the stock market, which at the time was less unpredictable and more predictable. Large market players frequently use fractal trading, which is the best sign of a fractal’s dependability. Because the fractal combinations contain qualities like self-similarity, scaling, and memory of the entry conditions, they can be employed well for price forecasting.
The Fractal Pattern
The price movement that takes place over a time frame of five candlesticks is what makes up the fractal pattern, which can be seen on both bar charts and candlestick charts. The exact amount of time needed to generate a fractal pattern varies depending on the charting time frame a trader is utilizing. A fractal pattern can develop for a trader using the hourly chart in five hours, whereas fractal patterns develop for a trader using the daily chart over five days.
So, how does the fractal indicator appear? The Williams’ fractal indicator has the benefit of being reasonably simple to notice on a chart. The fractal pattern is made up of five consecutive candlesticks, with the middle candlestick serving as a representation of the highest high or lowest low in the group.
The basic rules for the fractal pattern are as follows:
- In the price action movement of an asset, a candlestick will be the third, or middle, candlestick in a fractal pattern representing a high point in the case of a bearish fractal or a low point in the case of a bullish fractal.
- When the two candles that come before a candlestick that reaches a high point on the chart and the two candles that come after the high point reached by the third candlestick in the pattern both exhibit lower highs, this is known as a bearish fractal pattern.
- When the two candlesticks that come before and the two candlesticks that come after a low point candlestick on the chart both exhibit higher lows, a bullish fractal pattern is formed.
Pros and Cons of Fractal Indicator
The fractal indicator has the benefit of offering traders easily recognizable price points for stop-loss orders as well as market entrance points at the close of the fifth candlestick in the pattern.
A trader may sell short in a bearish fractal formation and then possibly place a stop-loss order right above the pattern’s highest high. A trader who is using a bullish fractal pattern would purchase at the close of the fifth candlestick and possibly place their stop-loss order right below the pattern’s lowest low.
The fact that fractal patterns appear frequently during normal price action movement is a drawback of trading off of the fractal indicator since it makes the indicator more likely to give traders erroneous signals. Few traders use the fractal indicator only for trading signals; instead, they combine it with other technical indicators.
The fact that the fractal pattern offers less-than-ideal market entry locations is another drawback of trading it. An investor may enter the market at a price level that is significantly higher than the market low if they start a buy trade at the close of the fifth candlestick in a bullish fractal formation. Additionally, the trade’s potential loss could be too high if the trader places a stop-loss order below the low of the fractal pattern.