Fractals

Definition:

The Fractal technical indicator was developed by psychologist and trader Bill Williams who described it in his book Trading Chaos. This trading classic covers how to combine trading psychology and Chaos Theory to better understand and forecast market price movements.

Fractals can be either bullish or bearish and consist of recurring price patterns which can be used to confirm price trend reversals. They need to consist of at least five bars, and are typically plotted as a set of high and low arrows superimposed over the reversal points in the price action.

Fractals are lagging indicators so they do not have predicative value for the price since they follow it. Traders generally use them with other indicators to confirm that reversals have indeed occurred.

Sample Chart:

Usage:

Fractals are generally used in identifying whether or not a price reversal has occurred. While not often used on their own, one of the most common usages of Fractals as an indicator is in combination with the Alligator trading system developed by Bill Williams.

For example, a combination trading rule might involve not closing longs or selling if the Fractal is lower than the Alligator’s Teeth (the central average or Red Balance Line in the Alligator Indicator). Similarly, you would not close shorts or buy if the fractal is above the Alligator’s Teeth.

Furthermore, Bill Williams, in his book Trading Chaos, suggested the following trading rules using the Fractal indicator that helps to reduce unprofitable trades:

"Our first signal entry into any market is always the first fractal outside the Alligator’s mouth. Once this signal is hit, we will take any and all signals that are triggered in that direction.

If the buy signal is above the Red Balance Line (the Alligator’s Teeth), we would place a buy stop one tick above the high of the up fractal. If the sell signal is below the Red Balance Line, we would place a sell stop one tick below the low of the fractal sell signal.

We would not take a fractal sell signal if, at the time it is hit, the price is above the Red Balance Line.”

Calculation Method:

Define:

• n= the number of the time period bar in question.
• High(n)= The high price traded during time period n.
• Low(n)= The low price traded during time period n.

Calculate:

• An UP Fractal exists at n if the following conditions are met:
  High(n-2) < High(n)
  High(n-1) < High(n)
  High(n + 1) < High(n)
  High(n + 2) < High(n)
• A DOWN Fractal exists at n if the following conditions are met:
  Low(n-2) > Low(n)
  Low(n-1) > Low(n)
  Low(n + 1) > Low(n)
  Low(n + 2) > Low(n)

Practice Fractals Trading

Technical analysis with Fractals is a demanding skill that requires practice to master. We recommend that you use a demo account to train yourself for free before applying your skills to real money trading.
Most reputale trading platforms today (for example: GFC Trader, AVA Trader, Meta Trader) feature technical indicator functions which can be applied on real-time charts. You can open a free account, download the trading software and start sharpening your technical analysis skills today!

We recommend the following brokers:

Featured Brokers

Broker	Promotion	EUR/USD Spread	Leverage	Min. Deposit	Platform
	Welcome Bonus of up to $250	3 pips	1:200	$50	MarketTrader	More infoVisit website
	First deposit bonus gift of up to $1000 instantly	4 pips	1:400	$25	eToro	More infoVisit website
	$20 Bonus - No Deposit Required!	2 pips	1:200	50€	Plus500	More infoVisit website
	Deposit $5,000 and receive a $1,200 Bonus!	3 pips	200:1	$100	Xforex Platform	More infoVisit website
	Up to $1200 when you open a new trading accout	3 pips	1:200	$100	AvaTrader	More infoVisit website