The financial market has borrowed many concepts from algebra, physics and geometry. In his analysis, graphical constructions are used, and on the basis of mathematical calculations a variety of technical tools have been developed, for example, such as:
- fractal indicator;
- MASD;
- stochastic;
- parabolic;
- trading signals;
- automated trading programs.
Every year, experts and professionals improve innovative technologies, which makes it easier to trade for traders, find the best entry points to the market and more accurately predict changes in movement, momentum and quotes.
The use of fractals in trading
Bill Williams is the founder and creator of several technical indicators and strategies. It was he who created the fractal indicator, as well as the exotic Alligator tool, and developed trading methods for them.
Bill Williams along with Charles Dow, Ralph Nelson Elliot and other analysts made a significant contribution to trading. He wrote several books about him ("Trading Chaos, A Guide for Traders"), which are considered not only informative literature, but also a complete tool for beginners in trading in the financial market. The famous analyst identified certain patterns that occur during the bidding, on the basis of which he created the theory and developed an indicator of fractals based on them.
In the last century, trading was much more difficult. Traders did not have such a wide variety of tools, the ability to open transactions online, and independently predict market changes. In most cases, any analysis was delayed, and positions were opened with the help of intermediaries, most often by telephone.
Currently, trading is much faster, more convenient and easier. For traders and analysts, there are great opportunities for analytical and statistical forecasting of market movements, the latest programs and a large selection of technical indicators that automatically calculate indicators. Speculators do not have to waste time making mathematical calculations to analyze the market situation.
Fractals indicator is a tool for traders and experts, analyzing quotes and candles, market direction and setting special symbols in the form of small triangles on the chart. Such symbols are called fractals, they are calculated automatically and independently set on the chart using the indicator.
Features and types
To profitably trade in the financial market using fractals, you need to study the features of this financial instrument. According to the classification, the Williams fractal indicator is determined by rank. He analyzes five bars or candles.
The indicator is of two types:
- For the upward movement (bullish fractal).
- For a downward direction of market movement (bearish fractal).
And also keep in mind that a completely unformed fractal can be redrawn, so you need to wait for it to complete and not rush to open a position.
Fractal indicator description
This technical trading tool analyzes every five candles. As soon as the desired pattern is created in the financial market, he draws it and marks it on the chart with a special label.
During the formation of a fractal, after analyzing five candles, the middle bar has an extremum. For the rising market, the third candlestick will be the maximum and after the candlestick configuration (pattern) closes, the fractal will be determined on the chart.
For downward movements, everything happens in a similar manner. In order for the fractal to reflect on the chart, a pattern of five candles will also be analyzed, the average should have the lowest value and be at the very bottom of the combination.
The essence of fractal work
In trading, it is very important to open a deal on time. Therefore, among traders, only the indicator of fractals is valued without redrawing and lag. Professionals and experts of the financial market have developed a wide variety of trading strategies for working with fractals.
However, it should be borne in mind that this technical tool was originally intended for the stock market, which is slightly different in terms and conditions, and not for Forex, and especially not for binary options. Therefore, it is recommended to use the fractal indicator without redrawing in combination with tools for trading, which allow to identify market movements, its strength and overbought / oversold zones. These include:
- Moving Averages.
- Alligator.
- Stochastic.
- RSI
- Other indicators.
The essence of the work:
- On the breakdown of a fractal - a position is opened immediately after market quotes go beyond the limits of the fractal by one point. Forex usually uses pending orders.
- On the rebound - as soon as the fractal is indicated on the chart, you need to open a position in the opposite direction.
Tool settings and options
This technical indicator has standard parameters. Experts do not recommend changing them. Fractal indicator with settings is available on many trading floors, for example, on MetaTrader 4 and 5 versions, and to install it on the chart, you just need to click with the mouse. After this action, a window will open in which all its parameters will be written. In them, the user can choose the color scheme for fractals, bull and bear markets, as well as style.
Fractal Breakout Trading Strategy
To start the analysis using this tool, you need to study the information on how the fractal indicator works. There are several dozens and even hundreds of the most diverse strategies in trading that use fractal theory.
Breakout trade:
- To get started, you need to set the fractal indicator on the chart. In the settings you can select their color, which would be suitable for the bull and bear markets.
- Carry out an analysis of market movement and find out which way it is moving.
- Select the desired time frame (from M-1 to D-1).
- You can use any trading asset.
- Opening a purchase transaction - set a pending order to increase the price on the chart. The difference should be 1 point from the level of the last bullish fractal. As soon as the market reaches the required values, the transaction will automatically open. Set a stop loss at the level of the second minimum fractal in the middle candle (minimum extremum).
- Opening a sell position - a pending order is set to lower the price, at a distance of one point from the last bearish fractal. The stop loss level is set on the line of the maximum value of the upper bullish fractal (extreme maximum).
Fractal Trading Method
To work on the rollback of the market movement, a special strategy is used. A sale transaction is carried out immediately after the formation of a bearish fractal on the chart. The next candle should have an upward movement. A position must be opened immediately after it is closed.
A purchase transaction occurs by analogy. As soon as a bullish fractal forms on the chart, on the rollback you need to open a position to increase the price.
It is advisable to use a technical indicator - Alligator as a filter. It will indicate the direction of market movement, and weed out false signals.
Tool Benefits
Among the positive characteristics of indicators based on fractals, we can distinguish a convenient definition of the direction of market movement. This tool helps to identify trends and allows you to increase profits up to 80% by opening additional positions.
Example: a trader using fractals and other indicators or graphical constructions determined the direction of market movement. He was convinced that the trend would continue for some time. In this situation, he may open additional transactions. To avoid financial risks and minimize them, he uses pending orders, which are placed after each fractal at a distance of one point.
In addition, it is very convenient to set up support and resistance lines, trend channels and determine the general global market direction along their peaks. Fractals also help to find and determine the most promising points for opening deals.
Negative sides
The biggest drawback of this indicator is its redrawing. To avoid false signals, it is recommended to use additional tools as confirmation.
It is advisable to filter each signal using the Alligator indicator. It is based on three moving averages with different periods and allows you to fully analyze the market movement, filter out dubious signals and confirm the current market trend.
During the flat, all lines of the Alligator will be intertwined, which confirms the absence of impulses or trends. When the market volatility rises, the moving averages will start to diverge in different directions. This is regarded in trading as the beginning of a trend movement and an increase in bidders.
Conclusion
The technical indicator of fractals is a universal and classic tool for trading. Strategies created on its basis, when applied correctly, bring good profit for traders and investors.
It is always important to remember that any trading method must have mandatory confirming tools to filter and filter out false signals. Before the start of each trading day, it is necessary to conduct an analytical market forecast using analytics and statistical data. The accuracy and accuracy of the analysis will determine the correctness of the opening of positions and further profit.