Fractals were developed by Bill Williams and this type of technical analysis indicator is used in predicting a reversal in the current trend. Fractals mark the market’s top and bottom. We have down-going and up-going fractals. Made up of series of not less than 5 bar is the first with 2 bars after and before the maximum being the first. The second is similar to the first, the only disparity is that the second had the direction reducing. Arrows mark the fractals with high and low index.
A fine combination of fractals and an Alligator is recommended. You’ll stay away from going bullish if the fractal is located below the Alligator teeth, and selling should be avoided if it is lower. A powerful signal is represented by a fractal if it is located outside the Alligator’s teeth until another fractal shows up.
Buy or sell signals that are triggered via fractals are most effective when combined with other technical indicators, such as moving averages or Fibonacci retracement. This indicator is not widely use and thus it might be found on all charting applications. A wide range of third party plug-ins developments has opened up easier use of fractals.
How to trade with Fractals
Points at which price stalled and we saw a reversal is a big characteristic of fractals and this would allow me say that if price beats its old fractal a new strength emerges. The easiest application of the Fractals indicator is entering a trade at the breakout point.
I’ll love to make a remark here, fractals aid in describing levels of support and resistance.
Functions of a Fractal
- They can serve as trend line connector points
The very important points needed to draw a trend line i.e. tops and bottoms are provided by fractals. A notable advantage is show cased when using this as many investors out there make use of the same price points for drawing trend lines.
- Confirmation of trend
During bullish market conditions, we’ll notice that there are more up fractals broken than down fractals. On the other hand, there’ll be more down fractals broker during a downtrend. The first sign of price consolidation is seen when repeated break and advance of new fractals are seen as trend.
- Consolidation of trend
Price is subjected to a consolidation when we fail to successfully advance past previous fractals. Price would try to break in the opposite fractal to avoid coiling. If this measure fails to bring result then the trader should be ready for a ranging market session until an appropriate breakout.
The basic principle to learn from here when adhering to Bill Williams’ technique: it not to carry any signal from other technical indicators, until the bullish or bearish fractal is created outside the Gator’s teeth.