The use of fractal theory in scalping is convenient because the pattern is formed within minutes. It is enough for the trader to see the figure and catch the inertial movement that is easily predicted after it. The zone of accumulation of fractal candles allows you to determine strong levels of resistance and support, from which you can already build all sorts of strategies.
The proposed strategy is used Bill Williams Indicator “Fractals», a template that can be downloaded. This tool is one of the five indicators of the trading system that allows you to find the local bottom and top. A fractal up is indicated on the chart if two candles on both sides of the signal maximum are lower than the maximum of the central candle. In other words, the central signal candle should be the highest of the five consecutive candles. A fractal down is indicated when the central signal candle has a minimum closing price.
- The advantage of the strategy for beginners: the strategy gives an understanding of the principle of trading for a breakdown of a flat horizontal section, a fractal indicator simplifies the visual search for such zones. This is also a good example of a complex but understandable scalping strategy. Professionals working with the long-term, can wait for a signal and pay attention to the minute time frame. A beginner strategy is an excellent training simulator.
The author of the indicator regarding the formation of fractals notes the following points:
- It is not necessary that the number of candles in the fractal pattern is five. True, setting 7 or 9 candles in the settings will sharply reduce the number of signals.
- It is not necessary that the signal candle with the highest maximum also has the highest minimum. In other words, for the formation of a fractal pattern upwards, the minimums of the candles do not matter.
- When two fractal candles are formed in one pattern, the indicator does not take into account the second fractal candle. Traders are advised to refrain from opening a transaction altogether.
The indicator automatically finds similar candlestick combinations and marks the direction of the formed fractal with arrows.
The essence of the strategy is that sooner or later the price will break through the zones of fractal accumulation on the inertial motion. At the time of breakdown, we will open deals. Recommended currency pairs are EUR / USD , GBP / USD . Timeframe – M1 (1 minute). Trading is carried out by placing pending orders in case of breakdown levels.
Conditions for opening a long position:
- The indicator showed a zone of accumulation of upward fractals in a narrow price range. At least 3 fractals (at least 3 arrows) should fall into the zone. This means that the zone should consist of a minimum of 15 candles (in practice, much more, you will see this in the screenshot below).
- The distance between the first fractal (signal) candle up and a similar candle down is at least 7-8 points.
Subject to both conditions, we put a pending Buy Stop order at the level of one of the fractals directed upwards. Ideally, at the level of the first or maximum of the fractal zone.
We set the Take Profit setting level as follows: estimate in points the distance between the first multidirectional fractals (that is, the distance from the upper to the lower part of the fractal zone, which, according to the second condition, should not be less than 7-8 points). We take 70-80% from this distance, add it to the Buy Stop level.
At the same distance in points, just down from the first fractal up, set Stop Loss.
On the screen, you can see the zone of fractal formation in a narrow price corridor. The fractals themselves and their directions are displayed by arrows (relatively small, but this is an indicator property). Six of them (shown by red arrows) are almost at the same price level, which is a narrow range.
The blue arrow points to the first fractal down. The distance between it and the first fractal is up and will be the distance required to calculate the length of orders. Red horizontal lines from top to bottom are Take Profit, Buy Stop (set at the highest level from the fractal zone), Stop Loss.
The purple arrow points to the candle on which the transaction on the pending order opened, the yellow circle is the approximate place for closing the transaction.
Conditions for opening a short position:
- The indicator showed a zone of accumulation of downward fractals in a narrow price range. At least 3 fractals (at least 3 arrows) should fall into the zone.
- The distance between the first fractal (signal) candle down and a similar candle up is at least 7-8 points.
We place a Sell Stop order at the maximum or first fractal candle level down. We calculate Take Profit in the same way: add 70-80% of the distance between the first fractal candles up and down to Sell Stop (more precisely, subtract it, since Take Profit should be lower than Sell Stop in a short position). At the same distance up from Sell Stop we set Stop Loss.
Here, 4 fractals were formed in the same price plane and the order triggering point is marked with the purple arrow. The red circle is surrounded by a fractal, which almost reached the stop. If the stop length was about 50% of the distance between the first versatile fractals, the trade would close automatically at a loss. Yellow circle – closing a deal on a pending order.
Since the essence of this strategy is based on the breakdown of horizontal levels of resistance and support, you can trade on them (if you can build them and notice in time). The Fractals indicator simplifies the visual search for such zones. By noting the fractal signal candles, it helps to place other orders as well. As an additional filter on the chart, you can add the basic indicator “Alligator” (the strategy for working with which is described in this review ). If the fractal is located above the “Teeth” line, a long position does not open. A short position does not open if the fractal is located below the specified line.