Trading in the stock market can be difficult, especially for beginners. However, one of the critical ways to result in trading is familiarity with the various indicators and the conclusions that can be drawn from them. A fractal indicator is a tool that can help you identify trends and determine the best positions to enter a trade.
In this article, we’ll define the fractal indicator, explain how it functions, and cover some practical applications in trading.
What is the fractal indicator?
The fractal indicator is a method used in technical analysis to forecast market movements by analyzing fractals. Fractals are self-similar patterns that occur repeatedly on various scales of time. In finance, a fractal pattern keeps appearing at different price points.
A fractal has five bars or more. The highest and lowest points of the pattern occur in the central bar, while the high and low points of the other bars are lower and higher, respectively. The fractal is complete when the price forms a new high or low two bars to the right of the fractal’s design.
The idea behind the fractal indicator is that asset price fluctuations are not completely random. Observing the patterns generated by the price action might help you spot prevailing market trends.
How does the fractal indicator work?
The fractal indicator can do its job by picking the asset’s price action patterns. A fractal in the price action is a precursor to a trend. When the price develops a pattern of two or more bars with the maximum high occurring in the middle bar, this is considered a bullish fractal. When the price creates a pattern of two or more bars, with the lowest low occurring in the middle bar, this is a bearish fractal.
When a bullish fractal forms, it’s a sign that the price trend could continue in the upward direction.
On the other hand, bearish fractal forms suggest further market declines are possible — a short position entry signal for traders.
The fractal indicator can be helpful with other technical analysis tools like moving averages or support and resistance levels. You can use them to verify the fractal indicator’s predicted trend and pinpoint trade entry points.
How to use the fractal indicator in your trading strategy?
Now that we’ve covered the fractal indicator and its operation, we can discuss how you may use it in your trading approach. The procedure is as follows:
- Identify the trend: The market trend must be established before the fractal indicator can be used effectively. Technical analysis tools like moving averages and support and resistance levels might be used.
- Apply the fractal indicator: Once the trend has been established, the fractal indicator should be used on the chart. Most trading systems will have access to the fractal indicator, which may be used on any period.
- Identify the fractals: Check the graph for fractals. When a bullish fractal forms, it’s a sign that the price trend could continue in the upward direction. The formation of a bearish fractal suggests further price falls are possible.
- Confirm the trend: The fractal indicator should be used with other technical analysis tools to verify the emerging trend. Use a moving average, for instance, to back up a bullish trend shown by a fractal indicator.
- Enter a trade: You can enter a trade in the direction of the probable reversal if you have spotted a fractal signal and corroborated it with additional indicators.
Note! Many traders use the Bill Williams indicator in cooperation with other indicators like Alligator.
Identifying trend reversals with fractals
Finding market trend reversals is a typical application of the fractal indicator. Fractals can alert you to the possibility of a trend reversal as an uptrend or downturn begins to lose steam.
Here’s how to put fractals to work for you:
- In a five-bar series, the middle bar should have the entire series’ highest high (in an uptrend) or the lowest low (in a downtrend).
- Once a fractal has been located, a breakout in the other direction should be anticipated. If you spot a bearish fractal (five bars where the middle bar has the lowest low), you may confirm a trend reversal by watching for the price to break above the high of the middle bar.
- When the breakout is verified, you should enter a trade in the new trend’s direction.
You should verify any trend reversal with additional technical indicators or research because fractals sometimes give false signals.
Combining fractals with other technical indicators
When combined with other technical indicators, fractals can provide considerably more insight than alone.
Many traders, for instance, use fractals alongside moving averages and trend lines to verify the reversal of trends. When combined with oscillators like the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD), others use fractals to pinpoint trade entry points in a market.
Find the optimal set of technical indicators for your trading style and approach through trial and error.
The bottom line
A fractal indicator is a flexible tool that may be incorporated into many trading methods. Fractals can aid you in finding key levels, verifying trend reversals, and making more educated trading decisions.
Remember that fractals, like any other technical indicator, work best when combined with additional analysis and risk management methods. Successfully incorporating fractals into your trading strategy requires experience and practice.
