Fractals indicator review
Among the technical analysis tools for Forex trading, Bill Williams’ Fractal indicator occupies a special place as it is based on a special market theory, fractal. A little theoretical excursus in this case is necessary. Fractal theory is based on two simple operations: copying and scaling. The term «Fractal» itself is not strictly defined, but it has one key characteristic – self-similarity (fig. 1).
That is, it is a certain number of objects, each of which looks like a set as a whole, for example, a branching tree, in which each branch with branches looks visually like the whole tree. Fractals surround us everywhere, almost all social, political, economic phenomena are fractal – repeating in different scales. Fluctuations in asset prices are also fractals.
The creator of fractal theory is the French mathematician Benoit Mandelbrot. He also drew attention to the fact that the fractal patterns are traced in stock trading. Once he imposed daily price fluctuations on fluctuations of a longer period and found out that they are similar. It is this similarity that allows predicting the behavior of the asset price in the future.
Over time, the theory of fractals has acquired many supporters. The fact is that it turned out to be the only one pretending to the practical substantiation of the market theory. Before the fractals it was believed that there were a lot of objects on the market that reacted to certain events and were corrected by counteraction, i.e. the system was constantly in mobile equilibrium (full truth about Forex). But the researches of the 50s of the 20th century have shown that the model of random corrective oscillations is not always confirmed empirically and strong price oscillations occur too often. It was Mandelbrot who doubted the theory of random oscillations and offered his explanation.
The theory of fractal price movement uses the dimension «D», which was derived by the mathematician Felix Hausdorf, and the index of the mathematician Harold Hearst – «H», which correlates with the fractal dimension of Hausdorf as D = 2 – H. This formula shows the possibility of preserving a certain trend in a certain period of time.
At the same time in the financial market there can be H = 0.5, when prices fluctuate by chance; H > 0.5, when the trend is pronounced; H < 0.5 – flat movement. That is, random fluctuations in the market are not necessary, but possible and two other basic types of movement, which means that the theory of «random equilibrium» is doubtful.
And the fractal theory is used as an alternative for it: the price is constantly fluctuating and these fluctuations are repeated regardless of the time period, because the market is not random players, but traders who have certain preferences – to sell, buy or trade in flute. For this reason, the price can first move in one direction (momentum), then in another (correction), then return to the previous one and so on. Thus, constant oscillations form «market waves», each of which shows a pattern: «impulse-correction».
Several waves form a «medium» wave, which moves according to the «impulse-correction» pattern, «medium» waves form a large wave. A series of waves in a short period of time forms a short-term trend in a certain «average» period – a medium-term trend, large waves reflect long-term trends.
Bill Williams’ fractals
Based on fractal theory, Bill Williams, a famous trader and creator of several very popular indicators for Forex, built his indicator. He approached fractals creatively, so his vision of this theory caused controversy and not everyone agreed with him. But nevertheless, his approach also has a lot of fans, and Williams’ indicators are included in the list of pre-installed in trading terminals.
Williams’ fractals are used in a simplified form and represent local extrema on a segment of at least 5 bars (candles). On the price chart they form peculiar patterns, based on which traders can quickly assess the market situation. The Fractals indicator in the terminal displays these patterns automatically and shows the direction of the fractal with arrows.
According to Williams, the decision to exit the market by Fractals indicator is made after the last bar is closed. But, no matter how many bars there are, the first two bars should move in one direction, and the next two – in the opposite direction to the first two. It is this pattern that indicates that Fractals are in front of us. The price in the left part of the pattern is the price of an impulse, the right part shows the rollback price, the difference between these prices is called «leverage». The bigger the leverage, the higher the potential profit.
The principle of building an tool is such that it always lags at least by 2 bars. This is one of its main drawbacks. For this reason, it is not recommended to use Fractals on the timeframe less than H1, although many traders do not consider it possible to use the tool on this timeframe. For the most part, the Fractal indicator is suitable for medium- and long-term timeframes.
Fractals indicator in MetaTrader 5 platform
In MetaTrader 5 the Fractals indicator, you can find it in the list of standard timeframes in the navigation panel of the terminal on the left. From the settings, only the color of the arrows can be changed.
Fractals indicator signals
One of the important advantages of Fractals is that it shows local extrema and allows you to see the significant levels of resistance and support. But it is the breakdowns of these levels that increase the probability of false signals. A large number of false signals is one of the typical negative features of the Fractal indicator.
Bill Williams has created probably the most popular indicator Alligator for filtering false signals. In particular, he recommended to buy if the Fractal indicator was broken above the «alligator’s teeth» (red line) and sell if the fractal is broken below the red line. Fibonacci levels are also used to prevent false signals.
Fractals are used to trade on breakout levels, and if the price is higher or lower than the level shown by the previous fractal, then, according to Williams’ own assumption, this is a breakout. If the price is higher than the previous fractal, which is directed upwards, it is a «Buyer Breakthrough», if the price is lower than the previous fractal, it is a «Sellers Breakthrough». In any case, a trader who has seen these breakdowns can open positions.
Another application of the Fractal indicator is to determine the trend. Fractals indicating a purchase are more often seen on the upward trend, on the price chart, and fractals indicating a sale are more often seen on the downward price chart. If the price does not overcome the previous fractal, it is likely to indicate the flute, this is confirmed by the formation of the fractal opposite to the previous one.
Trading strategies based on Fractals indicator
There are Forex trading strategies that use only the Fractal indicator. But their use is associated with great risk due to the specifics of this tool and cannot be recommended, especially for novice traders.
The most famous strategy with the tool under consideration is «Fractals + Alligator», in which it is recommended to use any of the trendy classical indicators. Pairs with average volatility are traded on the timeframe from M15 and above. In this strategy, it is considered important not to trade against the Alligator indices.
First, it is proposed to find at least 5 consecutive bars, showing a pattern of a certain direction – at a minimum or maximum, with the maximum or minimum should be on the middle bar. Buying takes place when the price crosses the Alligator’s lines and there is a fractal pointing upwards above the Alligator’s «teeth».
Orders open above the closing price of the bar that created this fractal. The sale is made when the price of the Alligator line is broken through and the fractal directed downwards is formed below the «Alligator’s teeth». Orders are opened 2-4 points below the fractal bar closing price. The strategy is not implemented during the flat, which is indicated by the intertwining of Alligator lines.
Another strategy of Williams with the use of Fractals indicator uses oscillators for Forex: Awesome Oscillator and Accelerator Oscillator (fig. 5):
As part of the strategy, buy orders open when the price is above the red line («teeth») of the alligator, there is a breakthrough of the fractal in the upper direction, the last two columns of the Awesome Oscillator histogram are colored green, as well as the last three columns of Accelerator Oscillator. Sell trades open when the price is below the alligator’s teeth, the fractal breaks down, the last two columns of the Awesome Oscillator histogram are colored red like the last three Accelerator Oscillator columns.
Another strategy uses the Fractals indicator, the signals of which are confirmed by the popular classical tool Zigzag. This indicator shows the most significant extrema, which allows you to sift out false signals of fractals. Trading is carried out on a timeframe from M30 and higher. Buy orders are opened when a fractal directed downwards appears and the Zigzag has marked a new minimum. Sell trades are executed when a fractal directed upwards appears and the Zigzag shows a new peak.
One of the classic strategies with fractals is the strategy together with Fibonacci levels. It is implemented on a timeframe from M15 and more only in the direction of the trend. The main task is to properly prepare the Fibonacci grid. For this purpose, all levels are removed, except for the zone 0.15, -0.15, -0.85, -1.15, that is, on the chart it will look like a channel with two lines located on both sides of it.
The strategy is implemented when there are two consecutive fractals in one direction, at a distance between the upper and lower fractals of 20-100 points – the latter is not a prerequisite. After such fractals have been formed, the Fibonacci grid is plotted on the chart. When the third fractal is formed, the corresponding channel line is shifted so that it is drawn through it.
Then two additional levels are drawn: the first one is a horizontal line through the second fractal and the second one is a vertical line at the intersection of the 0.15 level and the horizontal line. And if the trend is uptrended, a Buy order is opened, and if it is downtrended, a Sell order is opened. Stop-losses must be set: when buying – below the third fractal, when selling – above it.
When applying Fractals, you need to be guided by a few rules. Thus, it is believed that a pattern is formed longer and it generates more reliable Forex signals. On a smaller timeframe, Fractals generate a lot of false signals. A fractal is the beginning or end of a trend. If there are several fractals directed in opposite directions, we should expect the formation of a strong trend in the direction of the fractal breakdown.
Fractals will allow you to determine the entry points to the trade, but it is not recommended for those who are just beginning to trade, as it is a rather complicated tool in the interpretation (Forex trading training). Also, it is not recommended to predict prices with the help of him alone, Williams himself believed that this indicator is an additional one, confirming the signals of not even one, but other tools. Besides, many people consider it correct to check fractals’ signals on one timeframe on other timeframes.