What are Forex fractals and trading strategies with their help
Fractals on Forex: the essence, types, and principles of formation. Advantages and disadvantages of the fractal theory of trade. Practical examples of fractal trading
In mathematics, a fractal is a set that has the property of self-similarity. Each part of this set repeats the same form as the set itself as a whole. In trading, a fractal is a pattern that represents a price extreme on a time interval of 5 or more candles. It is used as an instrument confirmation signal. Based on it, Bill Williams developed the indicator of the same name, with an example of practical application in combined strategies you will find in this review.
Fractals for beginners: the essence, features and fractal strategies with real examples
A fractal is one of the most successful patterns, in my opinion, that speaks quite clearly about a local trend reversal. Although the ideal symmetrical construction of fractal candles is rare in the real market, novice traders are one of the first to notice this pattern – it catches your eye almost immediately. Interestingly, this term was the first to introduce Bill Williams to the use of Forex, but it was used incorrectly. It has nothing to do with the mathematical theory of fractals and is a classic extremum used for trading from correction to the trend side.
From this review you will learn:
- What are fractals in trading, their advantages, and disadvantages?
- How to build combined strategies on fractal patterns.
And also get acquainted with practical examples of strategies based on fractals and fractal indicators.
What are fractals and how to build a strategy based on them
A fractal is a pattern that consists of at least five closed candles, where the central candle with respect to the other two candles on both sides is an extremum. We are talking about closed candles since the price jump is possible on the 5th candle, which can draw a new extreme. The difference between the value of the price increase of the candles to the left of the fractal (impulse) and the candles to the right (pullback) is called the “lever”. If the price at the moment of closing the last candle returned to the level of the beginning of the pattern (at the level of the first candle), the “lever” is considered equal to zero, the fractal is considered closed.
The market essence of the formation of a fractal is as follows (using the example of a fractal up): traders open deals according to the trend, pushing the price up. There comes a time when all who wanted to have already opened deals, there are no more buyers – this is how a fractal candle is formed. Then comes the rollback. The most “nervous” traders fold their positions, after which the price starts to go up again – a new fractal forms after the equilibrium point.
Features of the application of fractal theory in strategies:
- Each new fractal with minor rollbacks is considered a confirmation of the main trend and can be used to increase position volumes.
- Analysis of the so-called “fractal dimension” – from a larger time interval to a smaller one. For example, if a fractal is formed on a daily timeframe, then there is a probability of a fractal forming on a smaller timeframe (confirmation signal). For such an analysis, I recommend the Mini chart indicator-script, which on the main chart can display up to 60 charts of other timeframes and assets.
- Fractals can serve as the basis for building price channels, resistance and support levels. An example of such a strategy is discussed below.
Problems of fractal trading:
- Irregularity and ambiguity. It is believed that fractal strategies are best used in flat, when there are no sharp jumps and the market behaves relatively calmly and undulating. There are trending strategies: if after the first extremum after the rollback the second follows, we can talk about the breakdown of levels.
- Lag. A figure is considered formed only when two more candles close after the fractal. Therefore, this pattern is considered an auxiliary, confirming signal, but not the main one.
- True or false. This question is causing the most problems. The farther the pattern is from the standard, the more he should be in doubt. The smaller the timeframe, the more “apparent” extrema appear that turns out to be false. Partially solves the problem analysis of the pattern on 7 or more candles, but such pronounced formations are much less common.
Fractals themselves are just an information tool. Their most common combination is with the Alligator (also designed by Bill Williams) and with Fibonacci levels. The most common strategy is to trade on pending orders for the breakdown of a level built at least three fractal peaks.
Forex Fractal Strategies – Case Studies
The fractal trading strategies presented below cannot be called ideal, but there are no ideal universal strategies. Therefore, before reviewing practical examples, a few recommendations for novice traders:
- Each strategy is worked out in different market situations, after which the period of the greatest efficiency and the asset, on which the largest percentage of effective signals are determined, are determined.
- Each strategy should be considered as a free trading simulator. Even if for some reason you were unable to make money on these systems, take this as an experience. Such strategies primarily teach to understand, feel the market, help to understand the principle of combining the real market with technical analysis.
- A strategy is just a tool, while the trader controls it. You can give recommendations on how to properly hold the hammer and hammer it with nails. But only the trader himself can take this hammer in his hands and find for himself the most convenient way to hammer nails.
Each of the strategies below is based on indicators that are not part of the base. To start the strategy, you will need to download the template using the link provided (the indicator and strategy template is developed only for the MT4 platform), copy it to the appropriate folders and restart the platform. The procedure is described in detail in the second half of this review.
Conclusion. For novice traders, the fractal theory may seem complicated. Although the pattern is relatively well distinguishable, it does not form perfectly. Because of this, traders accept false inaccurate signals for workers. Good about what fractal theory is and how to work with it using cryptocurrencies as an example is described in a series of articles, the first of which can be found. I hope that the strategies proposed in the review will interest you. If you have any questions, ask in the comments, I will try to answer!