Although prices may seem random, they actually manifest themselves via repetitive patterns. One of the most basic repetition patterns is a fractal. Fractals are simple 5-bar inversion models - they were invented by Bill Williams.
Bill Williams was a well-known trader, author, and instructor with over 50 years of trading experience across multiple markets. He was known for his views on the psychology of trading, chaos theory and its application to technical analysis. He saw the market as having 5 dimensions that help traders understand the market's structure, and he developed several popular indicators. (Fractals, the Alligator, the Market Facilitation Index, the Awesome Oscillator and the Gator Oscillator).
Fractals are very useful for technical analysis and trading:
- They offer an entry strategy.
- They also provide stop loss levels.
- Fractals are natural support and resistance levels.
- Over longer periods of time, fractals can indicate significant levels.
- Fractals can be useful to identify Fibonacci retracement levels.
- Fractals make it possible to identify a trend (without bias).
Introduction to trading with fractals
When people hear the word "fractals", they often think of complex mathematics. This is not what we're talking about here. Fractals also refer to a recurrent trend that occurs in the midst of larger and more chaotic price movements.
A fractal is an entry technique that is traditionally defined as "a bar that has two previous bars and two following bars with lower highs or lower lows".
The below examples illustrate the various types of 5-bar fractals:
The obvious disadvantage here is that fractals lag behind indicators because they are drawn with a 2-bar delay. However, most significant trend reversals continue with other bars. Once a trend has been identified, the price should increase after a bullish fractal, or drop after a downward fractal.
Fractals indicate breakpoints
As fractals highlight the points where the trend has not held up and has been reversed, a new force can occur when the price crosses the previous fractal. The trading of break points is therefore an obvious and simple application of the Fractal indicator.
Using fractals as the linking points of trend lines
Fractals can offer an advantage to forex traders since other traders also use the same obvious prices to draw their trend lines. The Fractal indicator makes it easy to identify and connect the most significant high and low points in order to draw trend lines.
Using fractals to confirm of a trend
As a trend (upwards or downwards) progresses, new fractals appear. If the break through a previous fractal fails, this is a first sign of price consolidation.
Trading using fractals: Bill Williams' chaos theory
The fractal indicator is one of the five indicators used in Bill Williams' trading system. According to his trading strategy, fractals must be filtered using a confirmation indicator. The alligator is the one that is used most often. This indicator is created from 3 moving averages.
- If a "buy" fractal is above the alligator's teeth (red line), traders must place a buy order a few points above the "buy" fractal.
- If a "sell" fractal is below the alligator's teeth, traders must place a sell order a few points below the "sell" fractal's lowest point.
- Don't open any buy positions if a fractal forms below the alligator's teeth.
- Don't open any sell positions if a fractal forms above the alligator's teeth.
The main rule that takes priority over all rules when using Bill Williams' system: don't follow the signals of any other indicators until the first fractal (buy or sell) has formed outside of the alligator's teeth.
Fractals and Fibonacci retracement levels
Another strategy is to use fractals with Fibonacci retracement levels. One of the problems with fractals is finding the one to use to initiate a trading position. And one of the problems with Fibonacci retracement levels is choosing the retracement level to use. By combining the two, the possibilities are reduced, since a Fibonacci level will be traded only if a reversal fractal occurs from that level.
Test this trading strategy on a demo account
All of the technical indicators presented here in this article are available for free on the MT4, MT5 and cTrader trading platforms.
CFD trading is speculative and involves a significant risk of loss, so it is not suitable for all investors (74-89% of retail investor accounts lose money when trading CFDs).
FAQs
Bill Williams outlined specific conditions that must be met when combining the two indicators. To place a buy order, a buy fractal must appear above the alligator's teeth (red line). Similarly, to place a sell order, a sell fractal must appear below the alligator's teeth.
How to trade with fractal indicator? ›
Traders will look to buy when a bullish fractal appears, with a stop loss below recent lows. They expect prices to rise once the bullish fractal finishes forming. Bullish fractals are most important when they form along known support levels or after a market pullback during an uptrend.
How accurate is Williams fractal? ›
Red fractals indicate bullish trends and act as a buy signal; orange fractals indicate bearish trends and act as a sell signal. However, the Williams Fractal can send false signals; to enhance the accuracy of the indicator, it should be used with the Williams Alligator to identify trending markets.
What is the Williams fractal scalping strategy? ›
This strategy is based on the signals from Williams Fractals, taking the signals in reverse - red triangle indicates a bottom and hence we go long. The green triangle indicates a top so we go short. By default these signals are only accepted if they occur between the two Emas.
What is the best setting for the fractal indicator? ›
While the default setting for the fractal indicator is typically five periods or bars, it's important to note that there is no universally "best" setting for this indicator. The optimal setting may vary depending on the specific market, time frame, and trading strategy being employed.
What is the best period for a fractal indicator? ›
However, many traders commonly use a period setting of 5 or 14 when applying fractals to their analysis. Fractals are mathematical patterns that can help identify potential reversal points in the market.
What is fractal trading strategy? ›
Many traders use fractals to identify potential reversal points in already-established trends. A series of higher highs and higher lows can be disrupted by a fractal pattern, signaling the possible end of an uptrend. This can be used for anticipating reversals and catching opposite movements.
What is the 4 bar fractal strategy? ›
The four bar fractal is a simple measure of a turning point that I intend to use more in my trading. It's composed of four candles — the longer the time frame you're viewing it on, the more of an impact the signal is likely to have. If these conditions are met, we have a buy signal.
Is fractal a good indicator? ›
Simplicity: Fractal Indicators are relatively easy to understand and use, making them suitable for traders of all levels of experience. Spotting Trends: They are excellent for identifying trends and potential trend reversals, helping you stay ahead of market movements.
How does the Williams fractal indicator work? ›
A Williams Fractal pattern is recognized in uptrend when there is a sequence of at least five bars where the highest price is reached in the middle, preceded and followed by lower highs. Conversely, in downtrend, this sequence would feature the lowest value in the middle, surrounded by higher lows.
The ratio of the successive Fibonacci Numbers gets closer and closer to a certain value as n gets larger and larger. The value it settles down to as n approaches infinity is called by the greek letter Phi or φ, and this number, called the Golden Ratio, is approximately 1.61803399.
Does fractal trading work? ›
Breakout trend strategy, swing trading using fractals, and trading reversal patterns. Advantages: fractals indicate potential pivot points and help build support, resistance levels, and trend lines. Disadvantages: they send quite many false signals. Use fractals as an auxiliary tool in trading Forex or other markets.
What is the most successful scalping indicator? ›
Top 5 Scalping Indicators and Strategies
- The SMA Indicator. The Simple Moving Average Indicator or SMA indicator is the most basic type of indicator traders rely on to device a trading strategy. ...
- The EMA Indicator. ...
- The MACD Indicator. ...
- The Parabolic SAR indicator. ...
- The Stochastic Oscillator indicator.
Formation of Williams Fractal indicator
When the price of security forms three lower low candles followed by two candles with higher lows than the low of the previous candles, this formation indicates a bullish fractal pattern which signals a trend reversal to the upside in the security.
What is the most profitable 1 minute scalping strategy? ›
Top 1-Minute Scalping Strategies
- Trend Following. Trend following is one of the most popular strategies. ...
- Bullish and Bearish Flags and Pennants. This strategy involves identifying an existing trend and establishing flag and pennant patterns on a 1-minute chart. ...
- Other Continuation and Reversal Patterns.
The Fractal Chaos Bands indicator connects the highest/lowest price points on an interval with two lines and creates a band. The upper fractal line is made by plotting high prices and the lower fractal line is made by plotting price lows. The flatter the band is the more volatile the movement.
Does alligator strategy work? ›
Using Williams Alligator in Trading Strategies
In trend-following strategies, the Williams Alligator is used to identify the direction of the trend and take positions in the direction of the trend. This strategy can be effective in markets with clear and persistent trends.
