In line with other well-known indicators, Bill Williams developed the Fractals indicator, which is based on the notion of a fractal he introduced to the forex knowledge base. There may be various ways to apply it. Generally, it is used to identify stronger trend potential in the market and often market reversal points. Like any other indicator, there are advantages and disadvantages of it, and we will address all of that below so you may effectively use it in your daily activities.
There are two ways to find fractals on the chart.
The first one – manual. You will just have to read the following information and be able to identify each fractal on a chart according to the sequence of candlesticks required to form a fractal.
The second one – clicking to reflect the Fractals Indicator on the chart. You will see the way to do that in the next image.
A fractal is a sequence of five complete candlesticks. It may be either bullish (down) or bearish (up).
You may see a small complication in the naming compared to the usual methodology: bullish normally means rising and bearish usually refers to falling in the forex world. While here, you see that a bullish fractal is also a down fractal and a bearish fractal is an up fractal. No need to worry, it is quite straightforward as you will see, let us have a look.
To separate a fractal from the continuous sequence of candlesticks on a chart, we have to find an arrow-like formation of five candlesticks (although it does not always have to be clearly resembling an arrow). Once we separated the five candlesticks, we look at the middle one (the third one, which is in the center). So now, we have a central candlestick with two wings: two candlesticks on the left and two on the right. According to the relative position of central candlesticks tip, we can identify our fractal as either up (bearish) or down (bullish).
In a bearish fractal, the central candlestick has the highest high, while those on the sides have lower highs. The fractal as a whole point up, but it precedes a downward movement. That’s the reason it is called bearish. See the image below.
In a bullish fractal, the central candlestick has the lowest low, with the higher lows on the left and on the right, like it is shown in the next image. As it often comes before the market reversal to the upward direction, it earned its name as a bullish fractal.
Now as we know how to find fractals on a chart, let us examine some practical applications for this tool.
Ways to use
1. Fractals as a Stop loss. Another use of fractals may be the risk-management. Essentially, a fractal here serves as a stop loss level. An example below shows how opening a sell trade you may place your stop loss at the last up fractal (alternatively, if you buy, your stop loss will be at the level of the last down fractal). If you continue the marked line here to the left, you will see that it falls below the local resistance range (where the previous fractals up have their tips).
2. Fractal as a market reversal point. Using a fractal as a sign of market reversal is also among the most popular ways to use this indicator. The image below shows the price going down after a bearish fractal. For a trader, it would be a good moment to sell. Conversely, as the market often goes up after a bullish fractal, it would be a good moment to buy on it if this is indicated.
Ways to combine
It is always better to have several indicators in use complementing each other rather than relying on just one. The Fractals indicator is not an exclusion. It may be as reliable or unreliable as any other tool, that’s why we will have a look at how you may combine it with other methods.
1. Fractals + trend analysis. As the trend analysis is the basic approach in forecasting the market movement, we can include fractals into this logic. For example, we noticed that the market seems to be on a rise, we found a fractal as in the image below and it proves to be an up fractal. A bearish fractal following a rising market wave – that may be an indication for us that the market is going to continue the upward direction. So we would buy after the fractal is formed, keeping an eye on the trend expecting the further rise.The same logic would be applicable for a dropping market: seeing a downward trend and finding a clear fractal up, we would sell on an expectation that the market would continue moving down. To note: we use fractals here as an additional confirmation that we have understood the market intention correctly, rather than using the market trend to confirm our interpretation of a fractal.
2. Fractals + Alligator.Bill Williams is famous for a series of other indicators he developed, primarily Alligator, Accelerator Oscillator and Awesome Oscillator. It would make sense to combine fractals with one or several of them, as they follow the same internal logic. However, we keep in mind that the trend observation keeps being cornerstone for our market prediction. For this reason, the first step here is just as it was in the previous example: we notice a rising wave of the market. Then we click to add the Fractals and Alligator indicators. We see here on the image that the price in the selected fractal is above the last fractal up and the red line of the Alligator at the same time – that would be a signal to buy. Conversely, if the price is below the last fractal down and the red line of the Alligator, we sell. Thus, the approach here is to compare the price level to the previous up or down fractal in combination with the red line of the Alligator.
3. Fractals + Alligator (+ Awesome Oscillator and Accelerator Oscillator). This example is essentially the same as the previous one but reaffirms it by further adding the Awesome Oscillator and Accelerator Oscillator into the logic. Looking at the same fractal, we check it against the corresponding indication of the Awesome Oscillator and Accelerator Oscillator. The price here is above the red line and breaks above the last fractal up. Also, the last two columns of the Awesome Oscillator and the last three columns of Accelerator Oscillator are green. This reassures us that the market intends to rise, so we buy.
There are several adjustments that a trader needs to make when using fractals.
Firstly, a Fractals indicator is a lagging indicator. Before a fractal finishes its formation or is seen to be discarded a market may have already moved significantly. So, it’s important to get additional confirmation from other indicators.
Secondly, there may be a lot of fractals on the chart. This may create confusion. That is why you need to choose your trading strategy first or decide which fractal to trade on. Otherwise, trying the chase trades on each fractal may lead to losses.
And finally, fractals are more reliable when used on higher timeframes. However, there will be a smaller number of fractals formed on such a timeframe. Vice versa, on a lower timeframe there will be many single fractals formed but they have lower reliability.
Bill Williams Fractals is an interesting indicator with certain reasoning behind it and is among the basic ones which a lot of traders use it in their trading routine. It may be a very good element in the system of trading tools to identify possible market moves and make informed trade decisions. Use it carefully, trade with the trend, and you will be the safe side of the market.
Source : Bill Williams Fractals Indicator