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. We are grateful to the well-known figure in the trading community, Bill Williams, in this regard. 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 explore the Fractal Indicator from its definition to its application in financial markets.
What is the Fractal Indicator
The Fractal Indicator is a tool that marks repeating price patterns showing where the market changed direction. It highlights small highs and lows that form only after a complete sequence of price moves. This makes the indicator based on real market behavior rather than assumptions. A bullish fractal appears when a low is surrounded by two higher lows. A bearish fractal appears when a high is surrounded by two lower highs. A brief dip during low activity can precede a strong rise. The fractal marks the small low that starts the move.
The indicator also works in unusual situations. A cryptocurrency might jump suddenly after a minor news event. Fractals can mark the small highs and lows created in the minutes before the surge. These points show subtle reactions that often go unnoticed in regular charts. Different timeframes create different patterns. Short timeframes show many small points tracing minor swings. Longer timeframes show fewer points but often match important support or resistance levels. Fractals do not change once formed, so each point stays visible for reference.
The Fractal Indicator organizes price swings into visible patterns. It can reveal small shifts during slow trading sessions or unusual price moves after a gap. Users can see how these points form sequences, offering insight into how the market develops over time.
The Concept of Fractals and the Fractal Indicator Formula
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 Fractal Indicator formula defines how small highs and lows are identified on a chart. This formula checks whether a high or low is surrounded by two lower or higher points. Using the Fractal Indicator formula allows users to see where price recently reversed. A basic example of the Fractal Indicator formula is simple. A bearish fractal forms when a high sits between two lower highs. A bullish fractal forms when a low sits between two higher lows. This formula repeats across all timeframes and markets.
The Fractal Indicator formula does not predict exact moves. Instead, it highlights points where price changed direction before. For instance, a sudden jump in a stock may create multiple fractals in minutes. The formula captures each point without altering it after it appears.
Some traders combine the Fractal Indicator formula with trend lines or support and resistance. This approach shows how small patterns fit into larger price movements. Even in unusual market conditions, the formula identifies highs and lows that may otherwise be overlooked. Overall, the Fractal Indicator formula is a straightforward way to map price swings. It works on short and long timeframes, marking subtle turning points. Applying this formula consistently can help organize market structure and reveal hidden patterns in price action.
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.
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| 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.
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 strategies to trading with Fractals in the market:
Fractal Reversal Strategy Using Rising and Falling Fractals
In the first strategy, 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 an actionable opportunity for placing a Sell order. You can observe an example of this on the ETH/USD chart.
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| 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 high-probability signal to place a Buy order. Refer to the example shown on the ETH/USD chart.
The Falling Fractal demonstrates a Fractal Indicator strategy for lows. The Fractal Indicator strategy focuses on points where prices often bounce. Falling Fractals suggest zones for Buy orders. These points organize price movements and highlight minor turning areas that might be overlooked.
Fractal Breakout Strategy on Support and Resistance Levels
In the second strategy, 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.
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| 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.
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| Fractals Trade with Support Breakout |
Customizing Fractal Indicator Settings for Better Analysis
- Left bars: 2
- Right bars: 2
- Middle bar: 1 (the bar being compared with its neighbors)
Customizing Fractal indicator settings allows users to adapt the tool to different timeframes. For example, on lower timeframes, fewer bars can capture rapid price movements. On higher timeframes, keeping or increasing the default 5-bar setting helps identify major turning points more clearly. Using Fractal indicator settings effectively helps organize market structure and detect highs and lows that matter for trading decisions. Adjustments ensure that the indicator fits both short-term and long-term strategies, making it a flexible tool for price analysis.
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.
Fractal Indicator FAQ
This section answers common questions about the Fractal Indicator. It explains how the indicator works and how it is used across different markets. The goal is to clarify key points that may cause confusion during analysis. Each answer focuses on practical understanding and real chart behavior. This FAQ supports the main content and reinforces the concepts covered in the article.