Live Trading Using Fractal Indicator in the Financial Market

 

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:

1. 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.
2. 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.
3. 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:

1. 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.
2. 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.
3. 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.