You know, the term “fractal” comes straight from the world of complex math. It's all about expanding the idea of fractional dimensions to those cool geometric patterns we see in nature.
Today, I'm diving into how we can use fractals in trading. To me, fractals are those repeating patterns that show up among the larger, chaotic price movements. It literally means “broken” or “fractured,” but as a trading tool, I’ve gotta give a shoutout to Bill Williams, the genius behind the Alligator indicator. His Williams Fractal is like a radar for spotting reversal points—the highs and lows—marked with arrows. Up fractals and down fractals have their own unique shapes, helping me figure out which way the price might move. Bill's advice? Use the Alligator and Fractals indicators together. A long signal pops up when the fractal’s above the Alligator’s teeth, while a short signal triggers when it’s below.
The best part? The Fractals indicator comes pre-loaded on my trading platform, Pocket Option Terminal for innovative trading assessments and insights. No need to go searching for it; it’s right there, ready to go.
First off, I just need to slap these essential indicators on my charts.
No need to chase patterns; just install the indicator, and the software does the hard work to highlight all the patterns. But here’s where it gets interesting—these patterns pop up a lot!
Appearance and Setting
Fractals signal a bottom or a top. The basic fractal indicator needs just five bars to form. So, when I see a fractal, here’s the scoop on what’s happening:
What’s happening is that the fractal is hitting a new high compared to the previous fractal. Boom! An up fractal shows up on those candles.
How to Use Fractals?
This is where the real magic happens. I find that fractals shine the brightest when used with other indicators and forms of analysis. A great combo is the Alligator indicator, which uses multiple moving averages to give a clear picture. Check out the chart below—it’s showing a long-term uptrend with the price mostly hanging above the Alligator’s teeth (those middle moving averages). Since we're in an uptrend, I'm locking in bullish signals for buy opportunities. The system sets the entries, but managing that risk is up to me.
But here’s the deal—don’t go solo with fractals when trading. It’s best to mix them with other indicators, oscillators, and tools.
- First up, the number of fractals in one direction shows trend strength. In simpler terms, those “arrows” give me key reference points for opening positions.
- Next, these indicators are awesome for spotting peaks. So, by keeping an eye on the fractals, I can identify double tops, double bottoms, head and shoulders, and more.
- Finally, fractals might signal a trend reversal.
Trading on Fractal Strategy
Even though it’s not smart to rely on fractals alone, I know traders who hustle using them for quick trades, snatching up a bunch of contracts with a short expiration period.
The strategy’s straightforward:
- If the price breaks above the last up fractal, I buy a CALL option.
- On the flip side, I grab a PUT option when the price drops below the last lower fractal.
The expiration period is a minimum based on one candle's formation time.
I’m all about trading those short-term fractals while following long-term trends. During bigger uptrends, I focus on long trade signals, and when downtrends hit, I switch to short trade signals.
Here are some extra tips on fractals:
- Fractals work great with other indicators or strategies—they shouldn’t operate solo.
- Keep in mind, fractals are lagging indicators.
- The longer the time frame of my chart, the more reliable a reversal is. But it’s also worth noting that longer time periods provide fewer signals.
- I plot fractals across multiple time frames for a clearer view.
Fractals can be amazing tools when I mix them with other indicators and techniques. There are plenty of ways to use them, and everyone’s got their own twist. Whether it’s combining them with the Alligator indicator or adding some Fibonacci retracements, the options are endless.
