By Jade Bertin Last updated Mar 12, 2024

Fractal Trading: A Trader’s Guide to Using Fractals

Have you ever wondered what fractal trading is precise? Why are traders becoming so interested in trading fractals and all that has to do with it in the last couple of years? Is it specifically related to a strategy, or is trading fractals exclusively related to others?

First of all, choosing the ideal trading strategy with specific tools that allow you to make a profit quickly is something that is a priority for every trader. Therefore, one of the biggest reasons fractal trading is so popular is that it facilitates the daily trading of many beginners and experienced traders.

Well, before we see what fractal trading means, let’s just see the meaning of the term “fractal”, shall we?

What are fractals?

Fractals represent beneficial traders’ tools that enable them to enhance a trading strategy and use technical analysis once used with numerous other technical indicators. People know them as simple five-bar reversal patterns.

They are also widely considered a handy technique whenever people need them to identify a spot to place stop-loss orders or apply a safe market entry method. Keep in mind that fractals are viewed as natural support and resistance levels.

Fractals could also be spotted at much higher levels. Thus, we can say they are the perfect instrument to decide on a trend.

Understanding fractals

To learn fractal trading, it is essential to understand fractals first profoundly. So, when traders encounter the term, complex math is perhaps the first thing that occurs to them. Nonetheless, it’s crucial to note that fractals in trading are much different than in mathematics.

For example, in this case, we are talking about recurring patterns that emerge once the rice makes more significant chaotic moves. Generally, the pattern gets plotted with at least five or more bars.

To quickly identify fractals on the chart, here are the most important tips:

Here is the image that represents the basic variation of two different types of fractals. Even though they look a bit different, they still depict a solid and valid fractal pattern. Remember that available bars themselves aren’t enough to highlight a continuing reversal.

A pattern that includes lower highs on every one of its sides along with the highest high in the middle is known as a BEARISH turning point.
On the other hand, a pattern that has the lowest low in the middle with higher lows on each side is known as a BULLISH turning point.

What to keep in mind before using fractals?

Those who are wondering how to use fractals in trading should first keep in mind several things before getting to learn and do that:

Fractals imply lagging indicators.
The most reliable reversal comes along a long-running chart.
In order to use fractals the best, they should be combined with other Forex indicators or trading strategies. Traders aren’t advised to rely only on this indicator.
Multiple timeframes are always a better solution for plotting fractals.
The fewer signals will be generated in the longer time frame.

Get to know all the essentials of fractal trading.

So, now that you have a clear understanding of fractals in general, you’re ready to learn all the essentials of fractal trading. In general, trading with fractals represents a technical analysis practice that numerous short-term traders seem to adopt more and more.

There are two usual trading concepts when it comes to technical analysis that is correlated with fractals:

Fractal reversal patterns
Fractal multiple time frame analysis

Bullish Fractal reversal pattern

When it comes to a bullish fractal pattern that’s a reversal, here is how things are:

The third candle of five candles in a series is marked to have the lowest low.
The first two candles have higher lows compared to the middle candle.
The last two candles have higher lows than the middle candle.

When it comes to the bullish fractal reversal pattern, we can tell that it suggests the beginning of a new uptrend and the end of a near-term downtrend. Traders could use this pattern as a signal to exit an existing short position or long entry signal.

A great majority of traders in fractal trading reversal patterns will use fractal signals along with

oscillators such as stochastic index RSI (relative strength index) to confirm a bullish buy signal.

According to it, a fractal buy signal will be observed as a signal with greater validity once accompanied by an oversold signal.

Bearish Fractal Reversal Pattern

The Bearish Fractal Reversal Pattern is observed like this:

The first two candles have lower highs compared to the middle candle
The last two candles have lower highs than the middle candle
The third candle represents a series of five to have the highest high.

What a bearish fractal reversal pattern suggests is the end of a near-term uptrend and the beginning of an entirely new downtrend. All traders could use the bearish fractal as a short entry signal or a signal to exit an existing long position.

Keep in mind that fractal signals in conjunction with stochastic or RSI oscillators are often used by traders who aim to confirm a bearish sell signal. For that reason, a fractal sell signal is considered to have a much bigger validity once accompanied by an overbought signal.

Fractal multiple time frame analysis

Speaking of fractal multiple time frame analysis, we are thinking of another unrelated interpretation of fractal analysis in trading. So, in this case, traders could use fractionalized time frames in their analysis to draw trading ideas and forecasting views.

Suppose that one trader will use a daily or weekly chart time frame to see the complete picture of the market he aims to trade. For that reason, the trader could observe a more petite time frame such as a 15-minute chart or a 1-hour chart time frame to help fine-tune entry and exit points.

Here is what one ordinary trading strategy would look like, for example:

Identifying central trend direction on a daily chart
Utilizing a 1-hour chart for identification of entry and exit points into the market
Entry signals on the 1-hour time frame have to be considered only if they align with the trend deduced from the daily chart.
Signals that go against the trend are identified daily and are not signals to trade against the trend. They are instead a suggestion to exit existing positions.

What is a Fractal indicator, and how to use it?

As you’ve had the opportunity to learn, the fractal indicator represents a powerful technical analysis tool responsible for highlighting the local lows and heights on candlestick charts once the price movement is stopped and reversed.

Reversal points, in this case, are known as Highs and Lows. Since the breakout of these extrema can stimulate a strong move in the emerging course, fractals are often used to determine the direction of a price move.

Alligator Fractal Trading Strategy

Since Fractals function more productively when combined with Alligator Indicator, we’d like to point out that there’s a unique strategy that’s quite simple to understand. It is designed by Bill Williams, so when you hear the term “Bill Williams Fractal Trading”, it usually refers to the Alligator fractal trading strategy.

Alligator is responsible for filtering and clearing the signals generated by Fractals Indicator, and it’s a handy tool for finding the best entry points. Specifically, it’s advisable to go long once a buy fractal is above the red line of the Alligator Indicator, or what’s known to be Alligator’s teeth.

Once the sell fractal is much below the red line of the Alligator indicator, it’s advisable to go short. Remember that traders utilize this approach for both Forex and Stock markets.

Fractal Indicator Features

Here are some of the most significant fractal indicator features:

Fractals display local highs/lows and help traders identify resistance and support lines for particular instruments previously selected.
The fractal indicator is applicable in any given time frame.
On a chart, you can see fractals appearing very frequently. Trading all of them will only mean wasting time and money. Thus, traders utilize other indicators to filter their signals.
These fractals are commonly redrawn and constantly lag by two or more bars. Therefore, traders must be cautious when trading fractals and combining them with other oscillators and indicators.
Note that fractals are much more reliable on larger time frames. In that case, however, they’ll provide fewer signals.

Key Takeaways

As we had the opportunity to learn from the text when it comes to day trading with fractals, a simple strategy means the following key points:

Identifying a significant trend direction on a daily chart
Utilizing a 1-hour chart for identifying entry and exit points into the market
They considered entry signals on the 1-hour timeframe only if they aligned with the trend deducted from the daily chart.

The Fractal indicator represents a specific trading indicator primarily used in technical analysis. The main goal of this trading indicator is to identify potential trend reversal points in a particular market.

Usually, trading strategies need multiple technical analysis indicators to increment forecast accuracy. Thus, lagging technical indicators provide past trends, while leading indicators predict upcoming moves. Once you select trading indicators, you should consider other charting tools such as trend indicators, volatility, volume, and momentum.

Finally, there are only two ubiquitous trading concepts in technical analysis relating to fractals that you should remember>

Fractal reversal patterns
Fractal multiple time frame analysis.