Fractal Trading: The Basics

Fractal Trading: The Basics

When it comes to fractal trading, you’re talking about the identification of patterns hidden away beneath the larger chaotic movements of the market over a specific time frame. It is a type of technical analysis that is relatively new to trading, and as a result, has left many a trader scratching their heads in need of some help.

That’s why we’re here today, to help you understand the world of automated fractal trading, and to learn how you can use it to read trends, chart, understand systems, and ultimately make a buck or two.

What is Fractal Trading?

Fractal trading is a trading technique that sees traders trying to identify price reversal points in the market using fractals and candle charts. There are two types of fractals:

Bearish fractals happen when a pattern has its peak in the middle, with lower points on each side. Bullish fractals happen when the pattern has its low in the middle, and its highs on the sides.

The main downside to fractals comes in the form of time frames. You can’t draw a fractal until you are at least two days into the reversal. This is also called a lagging indicator. A fractal chart is made up of at least five candle bars. More significant reversal trends should yield more bars, which is of benefit to the trader. Once the trend has been established, patterns can be analyzed to predict the rise and fall of a price.

Does Fractal Trading Work?

The majority of charting platforms offer fractals as a trading indicator, which is quite convenient and a time saver for traders. All you have to do is apply the indicator to the chart, and watch the software work its magic. What you should immediately notice is that the pattern recurs frequently. This is why fractals are most effective when used with one or more other trend reading methods, also known as using confirmation indicators.

The most common of these confirmation indicators is the alligator, which is a tool developed via the multiplication of multiple moving averages. Here, the middle moving average is referred to as the alligator’s teeth and is the indicator used to determine whether you’re going to be using bearish or bullish buy orders.

When the price is primarily staying above the teeth, the trend is up, meaning you want to use bullish signals to create buy orders, and vise versa for bearish signals.

fractal tradingYou can also use Fibonacci retracement levels in conjunction with fractals. One issue with fractal trading is deciding which of the occurrences to trade. One issue with Fibonacci retracement is which retracement level you should use. Combining the two helps out both issues, and narrows down the possibilities, on account of the fact that a Fibonacci level is only going to be traded when a fractal reversal happens off that level.

When developing or using a fractal trading system, you need to control your own risk. Stop-loss orders are your safest bet, but how you do so is up to you.

Fractal trading is not for beginner traders. It requires a lot of technical analysis, understanding different types of charts, and reading price trends over certain time frames. Due to this, it is not a system that you should be looking into if you’re just starting out with trading. Stick to the conventional strategies until you have more experience under your belt before you jump into fractal trades, otherwise, you may risk losing your money for no logical reason.

There are a few things you need to keep in mind with fractal trading. Firstly, remember that fractals are lagging indicators. Also keep in mind that fractals are common, and should by no means be relied on by themselves to help you trade. Instead, you should be combining them with other indicators or strategies.

The longer the time frame that the chart reads, the fewer signals are generated, and the more reliable the reversal is. In order to get the most out of them, you should plot your fractal trades over several time frames. Trade short term fractals in the direction of long term ones, and visa versa.

Fractals have many uses to a knowledgeable trader, who can make use of them to greater effect. The novice trader, however, may find difficulty with them. That being said, fractal trading can work when done correctly. Make sure that you are combining it with other systems and indicators, and you should find it to be a useful tool.

How Do You Trade With Fractal Indicators?

Fractal indicators identify a top of bottom, and present themselves in at least five bars. A fractal qualifies when the previously mentioned bearish and bullish trends present themselves. Think of them as an n and u shape. We’ve already discussed how you trade with fractal indicators, which is by combining it with other indicators to create a strategy.

As such, it should be treated merely as a tool rather than a definitive method, and under no circumstance should it be used by itself to determine your trades. Whether you use the alligator method or Fibonacci retracement is up to you. There are plenty of other types of indicators and strategies out there that you can combine fractals with, it’s simply up to you to find the ones you want to use.

Fractals have strict rules, there is not much room for doubt when it comes to using them. It paints a clear picture that can be used to heighten any trader’s game, so long as they know how to use it. If they don’t, they may end up in a world of hurt as a result of not understanding the systems they’re working with. So make sure you understand what you’re doing before you try to make any trades off the back of strategies involving fractal indicators.

There’s not much for us to say on the matter. Just remember to stay safe, and never invest what you can’t afford to lose. This goes double for lesser-known strategies like fractal trading, where you may be unfamiliar with some of the technicality involved.


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