Hello dear readers, in the previous article, I had talked about
Chaos Theory. This theory is used in many fields. For example: Environment,
Art, Economy, Psychology, Astrophysics, Seismology, Epidemiology, Weather
Forecasting, Traffic Flow, etc. Of course, the area we are curious about is how
it is used in Financial Markets. In this regard, we are grateful to the
well-known figure in the trading community, Bill Williams. B.Williams has
developed several technical tools to apply Chaos Theory in financial markets.
One of them is the Fractal Indicator, which forms the main theme of this
article. We will cover the following topics:

- Concept of Fractals and the Fractal Indicator
- Structure of the Fractal Indicator
- Trading in the financial markets using the Fractal Indicator

**The Concept of Fractals and the Fractal Indicator**

Fractals are mathematical objects with recurring patterns
that interlock and resemble each other. These objects exhibit a characteristic
of repeating the same structure at every level and branching infinitely. For
instance, tiger and leopard skins, snow and ice crystals, sound waves, plant
branches, star clusters, galaxies, etc., possess fractal features. The term **“Fractals”** refers to a technical analysis tool used in financial markets. This
indicator was developed by the famous trader Bill Williams to identify market
trends, reversal points, and peak-bottom levels in price charts. Price
movements in financial markets also exhibit complex structures, and with the
notion that these movements are not entirely random but contain certain order and
repeating patterns, B. Williams designed this technical analysis tool. For this reason,
we can use the Fractals indicator to examine and analyze such patterns in
financial markets.

**The Structure of the Fractal Indicator**

When trading in the Forex market, we will come across two
types of Fractal patterns. These are *the rising Fractal (Bullish Fractal)* and*
the falling Fractal (Bearish Fractal)*. Both Fractals consist of five
candlesticks.

**The structure of a Rising Fractal is as follows:**

- Center Candle. The middle candlestick features the highest high price. This is the candlestick numbered 3 in the Bullish Fractal section of the Bitcoin/US Dollar chart.
- Two Left Candles. The two candlesticks preceding the center candle close with lower highs. Refer to the candles marked 1 and 2 in the Bullish Fractal section of the BTC/USD chart below.
- Two Right Candles. The two candlesticks following the center candle close with lower highs as well. Refer to the candles marked 4 and 5 in the Bullish Fractal section of the BTC/USD chart below.

These two lower high price candles encircle the central
highest high price candle.

The Rising and Falling Fractals in the BTC/USD chart |

**The structure of a Falling Fractal is as follows:**

- Center Candle. The middle candlestick features the lowest low price. This is the candlestick numbered 3 in the Bearish Fractal section of the BTC/USD chart.
- Two Left Candles. The two candlesticks preceding the center candle close with higher lows. Refer to the candles numbered 1 and 2 in the Bearish Fractal section of the Bitcoin/US Dollar chart.
- Two Right Candles. The two candlesticks following the center candle close with higher lows as well. Refer to the candles numbered 4 and 5 in the Bearish Fractal section of the BTC/USD chart.

These pairs of candles form a pattern that encloses the
center candle with the lowest low price.

**Trading in Financial Markets with the Fractal Indicator**

I think it falls instead of reminding you of something. The Fractal indicator is added with a default period of 2, but this setting can generate more frequent and inaccurate signals. Depending on your strategy, you can optimize this period to 8, 9, 14, etc. Fractals not only help us detect peaks and troughs in price movement, but they are also essential for determining support and resistance levels. Finding the correct support and resistance levels means we’ve accomplished half of the task. Now we can engage in trading in the market. There are two different approaches to trading with Fractals in the market:

1️⃣ In the
first method, a Rising Fractal is likely to trigger a price retracement. This
is because it marks the highest peak in price movement and aligns with a
resistance level. Price trends often reverse at resistance levels, indicating a
potential opportunity for placing a **Sell **order. You can observe an example of
this on the ETH/USD chart.

Fractal Indicator for Reversals and Entry Points |

Similarly,
the same principle applies to the Falling Fractal. It represents the lowest
trough, acting as a support level. Prices frequently rebound from support
levels, providing a signal to potentially place a **Buy** order. Refer to the example
shown on the ETH/USD chart.

2️⃣ In the
second method, we anticipate the breaking of the Support and Resistance levels
defined by the Fractals. If the resistance line in the Rising Fractal is
breached, meaning there is a full candle closure above the resistance line, we
then place a** Buy** order. Look at the example BTC/USDT chart.

Fractals Trade with Resistance Breakout |

Similarly,
in the case of the Falling Fractal, the situation is identical. If the support
line is broken this time, indicating a candle closure below the support line,
we execute a **Sell **order. Refer to the example BTC/USDT chart.

Fractals Trade with Support Breakout |

**Please
be aware:** There is
a risk of capital loss in the Forex Market. Just like any other technical
analysis tool, Fractals can also generate incorrect signals. Therefore,
it’s important to trade carefully and apply solid risk management
principles diligently.