The Fractals indicator helps tp determine turnaround points of the market. Fractals Indicator seeks for certain price patterns, which consists of 4 candles of the chart. The advent of these models indicates the end of a trend or a trend reversal.
A significant part of the community of traders believes that the markets are not completely random, and the prices of securities are subject to certain rules and form certain patterns, which can predict the future behavior of prices. Thus, the Fractals Indicator detects two types of patterns Bearish Fractal and Bullish Fractal. It is believed that Bearish Fractal occurs at the end of the uptrend movements. Likewise Bullish Fractal tend to close downwards movement.
- A Bearish Fractal appear when there is a pattern with the highest peak in the middle and two lower highs on each side.
- A Bullish Fractal arises when there is a pattern with the lowest low in the middle and two higher lows on each side.
It is known that Bill Williams introduced Fractals Indicator as a part of his famous Trading System.
Since for the detection of the Fractal, five bars need to be compared; calculations are given for the bar number N-2, assuming that current bar has number N.
N-2 bar is considered a Bearish Fractal if:
- (N – 4) High < Bar High of (N – 2)
- (N – 3) Bar High < High of the (N – 2) bar
- High of (N – 1) < (N – 2) Bar High
- Bar High of (N) < High of (N – 2) bar
N-2 bar is considered a Bullish Fractal if:
- Low of (N – 4) Bar > (N – 2) Low
- Bar Low of (N – 3) > Low (N – 2)
- (N – 1) Bar Low > (N – 2) Low
- Low (N) > Bar Low of (N – 2)
Taking into account that Fractal Indicator needs at least five closed candle bars to indicate one of the Fractals it is rarely used in trading alone. Typically, this indicator is used alongside wits Moving Averages or Alligator Indicator to generate trading signals or to determine support/resistance levels.
Fractals and Alligator Signals
Bill Williams, in his book Chaos Theory, suggests the following strategy:
- When Alligator shows Buy signal – place a Buy Stop above the latest Bearish Fractal
- When Alligator shows Sell signal – place a Sell Stop below the latest Bullish Fractal
Fractals Support/Resistance levels
There are two ways to determine support/resistance levels with Fractals. First is to connect onesided fractals to form trendlines. Second is to identify channel with the help of Alligator.
The graph shows channel levels during Alligator sleeping phase, which indicates market lateral movement