What is a fractal? It is a mathematical set that has the property of self-similarity. And the self-similarity of sets is key to your successful trade. We want or do not want to, and we work only in strictly defined, periodically repeated conditions. What 's not a fractal?
The Fractal indicator has not been successfully used by many traders for Forex trading for the first year. This is a technical indicator aimed at defining the depressions and vertices of the graph. It picks up similar sets of data that allow you to earn.
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The Fractal indicator makes it possible to analyze the market by the real situation, without referring to historical data - only five last bars are enough and understanding the symmetry of any price fluctuations.
Fractals was the first to use Bill Williams as a technical tool, at the time this caused a lot of controversy about their effectiveness in financial markets. Especially the author used a large number of special terms, such as an attraction, which did not add popularity to the instrument among beginners.
The Fractala Williams indicator is quite far from classical mathematical theory, and in fact, represents just another price extremum on site 5 and more bars. These are the usual highs/lows traded on corrections and kickbacks - this requires opening a position towards the overall trend line. However, they appear on the chart quite often, it does not positively affect the reliability of signals, but if used correctly bring stable profit.
It is believed that fractals as turning figures are better used in the side market (flute), although the author recommends them only for trend strategies. Let 's look at issues that are not visible to newcomers, or silenced by developers of commercial strategies and automatic advisers.
The Fractal indicator uses a minimum of five Japanese candles and the decision to enter the market needs to be made only after the last bar of the pattern is closed. It happens that it is on the fifth candle that a price impulse occurs, making the whole model false. The price difference between the left (impulse) and right (rollback) part of the figure is called the "lever." There is a direct relationship between the amount of leverage and profit: the larger it is, the higher the potential income. When the price rolls back to the generation start level, the lever becomes zero and the pattern is considered closed.
Regardless of the total number, the Fractal indicator must have two first bars running in the same direction, then two in the opposite direction. Thus, we have two bases for the upper (respectively two vertices for the lower) model and a central vertex/bottom. Williams believes that it is possible not to pay much attention to internal bars, it is enough to understand the general principles of fractal models, which also include Fibonacci levels, Pivot Points, trend lines and time analysis by the Gunn method.
The upper fractals are considered stable if the length of the segment between the bases of the left and right edge bars is less than between the bases and the vertex. The same scheme applies to the descending model.
The Fractal indicator contains the "compression" effect when the above conditions are met. Once the work is complete, the compression force decreases, and wait for the next, in most cases, turning signal.
In terms of trading psychology, the Fractals indicator works as follows. If the balance of "money" changes in favor of buyers or sellers, sooner or later there will be a moment when most of the players have entered the market. The open interest reaches a maximum and the price begins to reverse. When all the "nervous" Stop Loss of small traders worked on it, the trend resumes to remove the rest of the open interest. When the equilibrium point of the indicator has passed, you can look for the possibilities of opening: both in the trend and in the direction of the reversal.
Properties and problems of the indicator
Technical analysis identifies three main properties of fractals, allowing them to be used to predict price movements:
Irregularity. It manifests itself as periods of great volatility, accompanied by sharp price pulses, "breaking" the current trend after the formed Price Action patterns.
Self-similarity. The Fractals indicator works equally reliably on any Forex trading asset and timeframe. Due to similarity, they can be used in complex strategies such as "Three Elder Screens."
"Memory". It is quite controversial that the model is able to "remember its initial state."
There is also the concept of dimension from large timeframes to junior, i.e. the use of fractal designs makes sense only from top to bottom. The maximum/minimum, for example, D1 will be a similar point and at smaller intervals. Similar similarities do not always work for max/min levels.
The Fractal indicator is not redrawn and the trading signal is not cancelled until it appears. Its strength depends on position relative to other indicators.
The main disadvantage of the tool is lag - any model will not be considered valid until the appearance of two turn bars. Thus, a possible signal is always delayed by at least two bars - this may be sufficient for a serious error even on the recommended hour (Н1) time frame. The only option to compensate for the delay as much as possible will be to switch to medium- and long-term trade strategies when the trend continues for a long time, and periodic kickbacks can be neglected by adding the volume of the position after the emergence of new fractals in the direction of the main movement.
Fractal indicator in trade practice
After the model is formed depending on the position on the graph, it is necessary to determine to which class of fractal figures it belongs: start, signal or stop. The start will be any patterns, after which the reverse signal of the indicator is generated. The start/signal pair is usually at the same time interval.
It is recommended to use different "equilibrium levels" in strategies such as moving averages, channel indicator boundaries, Fibonacci levels. Do not open a purchase if the Fractal indicator is below the level, respectively skip the sale when it is above equilibrium.
Forex trading practices have shown the following uses:
Finding of an entry point. The easiest way to operate on indicator data is to hold a warrant above/below the central bar of a strong support/resistance or significant extremum.
Confirm current or new trend. Several identical consecutive fractals: ascending are updated more often, on downward movement we look for patterns at new local lows.
Detection of the flet. If the previous maximum/minimum is not broken and there is a clearly non-classical design, this may mean the beginning of consolidation. Here it is necessary to wait for a market reaction to the following reverse fractals, which may be the boundaries of the price movement corridor.
Determination of the validity of fractals
This problem is a major source of errors, similar to estimates of the truth of the support/resistance breakdown. Regardless of the specific methodology, the general principle of reliability determination is as follows - any deviations from the classical species should be questionable. As with all technical analysis, reducing the timeframe increases false signals and clutter the graph.
By working large patterns, it is better to open positions at the moments of correction of the last price pulse, which are located in the left part of the formation. Within the pattern, standard Fibonacci corrections work reliably by 38% (0.382), 50% (0.500), and 62% (0.618). If you "stretch" levels through adjacent indicator signals, you can open through limit orders near key levels.
In the same way, you can protect the deal from an unpredictable reverse breakdown by gradually moving Stop Loss, to control the opposite max/mix of the last and penultimate candle. When the structure is just formed, the stop should be a minimum of 5-10 points above or below the last signal given by the Fractal indicator. Then with minor kickbacks we remain in the market, and if there is a complete change of trend, the deal will close with a minimal loss.
There is another way to determine that we have false fractals in front of us - when they are punched by a bar with a long shadow and a small body (pin bar). The longer his "nose" the stronger the turning signal meaning that the market failed to pass the level of the last pattern from the first time. If the trial took place and the next candle is closed above High (for sale) or below Low (for purchase) of the nose, it is highly likely to miss the signal and wait for the next one. A similar situation can occur in 3-5 bars, but we pay attention only to the bar that broke the Fractals indicator.
The Fractal indicator and its modifications plot many potential entry points for any taste, most of them seem quite reliable. In fact, this analysis technique is not so simple and unambiguous. Newcomers are not encouraged to use it as the only decision-making factor
Separately, it is necessary to talk about attempts to use such indicators in automatic advisers. The results are not encouraging - until an algorithm is created that can replace visual analysis, especially non-ideal structures, which in the real market are more than 50%. You can both open a lot of loss-making deals and skip good entry points.
Fractals cannot be used for price forecasting. Even Williams considered them to be at least only the third confirming factor. Note that the standard Fractal indicator in the basic set of trading platforms has no parameters, so choose modifications where the number of settlement bars changes. So you can, more accurately, tune in to a particular asset.
The use will have a positive result only in combination with other indicators at intervals of an hour or more. Strategies that include the Fractals indicator must analyze multiple timeframes.