Although Forex prices might appear to be random, they do create repeating trends and patterns. The most basic of these patterns is the fractal. Fractals are just five-bar reversal patterns. It’s important to learn about fractals and how they can be applied to the trading strategy.
Fractals can also refer to any recurring patterns that happen amid larger and more chaotic price movements, and that is what happens during Forex trading.
When most people hear the term fractal, they think about complex math, but that’s not what is going on here. Fractals can also refer to any recurring patterns that happen amid larger and more chaotic price movements, and that is what happens during Forex trading.
Fractals have five or more bars, and the rules for identifying them are simple.
For example, the bearish turning point happens when you have a pattern with a higher-high in the middle with two lower highs to the sides. The bullish turning point happens when you have a pattern with a lower-low in the middle with two higher lows to the sides. In a sense, the bearish fractal looks like the top of an arrow (using five bars) while the bullish version is inverted.
One drawback to this is that fractals are lagging indicators. You can’t draw the fractal until you’re two days into its reversal. However, to combat this, most significant reversals continue for many bars, which benefits the trader. You can easily see the pattern once it happens and can tell that the price is expected to continue following a bearish or bullish fractal.
Many charting platforms use fractals and one of the trading indicators. Therefore, traders aren’t required to hunt around for the patterns. When you apply the fractal indicator to the chart, the software then highlights all the patterns. Once this happens, traders will usually notice an immediate issue: the pattern occurs frequently.
Fractals are better when used with other forms of analysis or indicators. Many times, fractals are used in conjunction with alligators. The alligator is a tool that is created when you use more than one moving average. If the long-term uptrend has a price that stays primarily above the alligator teeth (or middle moving average), bullish signals can be used in this situation to generate your buy signals.
It is a little confusing, but a bearish fractal is usually drawn on your chart with an upward arrow above while bullish fractals are drawn on the chart with a downward arrow below them. Therefore, if you use fractals with an overall uptrend, you should look for any down fractal arrows. However, this only works if you use a charting platform with a fractal indicator option. When you’re looking for bearish fractals in a large downtrend, you need to look for fractal arrows that point upward.
Many times, when you switch to a longer time-frame, it reduces the number of fractal signals, which allows your chart to have a cleaner look and also makes it easier for you to spot your trading opportunities.
This particular system allows for entries, but it is up to you to control the risks. For example, you might not recognize the pattern until the price raises off a more recent low. Therefore, your stop loss could be placed below that recent low once the trade is taken. If you’re going short, such as during a downtrend, the stop loss is likely to be placed above a recent high. Learning where to place your stop losses is challenging, but it does get easier with time.
Another fractal strategy to consider includes the Fibonacci retracement levels. One of the problems traders face is knowing which occurrence to trade and one issue with the Fibonacci retracement levels is determining which retracement level you should use. When you combine the two, it narrows down your possibilities because a Fibonacci level can only be traded if fractal reversal happens at that same level.
With the Fibonacci retracement levels, traders tend to focus on particular Fibonacci ratios. This can vary depending on the trader, but if you like to take longer trades, you may find that when you’re in a large uptrend and the price pulls back to a 61.8 percent retracement level, you can add fractals to your strategy. You only take the trades if the fractal reversal happens near that 61.8 percent retracement mark, as well as ensuring that all other conditions are met.
It does take time for this to happen because you’ll remember that the fractal is only visible after two days. If it occurs after the low near that percentage level, you can initiate your long trade, which is in alignment with a long-term uptrend.
The taking of profits can also be a time to use fractals. For example, if you’re going long with a bullish fractal, you could choose to exist the position when a bearish fractal happens. You can also use other exist methods, such as trailing stop loss or profit targets.
When you’re using fractals, it is essential that you remember a few pointers. These include:
If you hope to use fractals during Forex trading, it is essential that you choose a charting platform that offers fractals as an available indicator.