Traders also tend to focus on trades at certain Fibonacci ratios. This may vary by trader, but say a trader prefers to take long trades, during a larger uptrend, when the price pulls back to the Fractals could be added to the strategy: the trader only takes trades if a fractal reversal occurs near the The chart below shows this in action.

The price is in an overall uptrend, and then pulls back. The price forms a bullish fractal reversal near the 0. Once the fractal is visible two days after the low , a long trade is initiated in alignment with the longer-term uptrend. Taking profits could also involve the use of fractals. For example, if going long on a bullish fractal, a trader could exit the position once a bearish fractal occurs.

Other exit methods could also be used, such as profit targets or a trailing stop loss. Here are a few things to remember when using fractals. Fractals may be useful tools when used in conjunction with other indicators and techniques. Fractals can be used in many different ways, and each trader may find their own variation.

Using an Alligator indicator is one option, and another is using Fibonacci retracement levels. While some traders may like fractals, others may not. They are not a requirement for successful trading and shouldn't be relied on exclusively.

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Table of Contents Expand. Table of Contents. Introduction to Fractals. Applying Fractals to Trading. Further Considerations. The Bottom Line. Technical Analysis Advanced Technical Analysis Concepts. Key Takeaways Fractal markets hypothesis analyzes the daily randomness of the market through the use of technical analysis and candlestick charting.

It examines investor horizons, the role of liquidity, and the impact of information through a full business cycle. The market is considered stable when it is comprised of investors of different investment horizons given the same information. Crashes and crises happen when investment strategies converge to shorter time horizons.

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This compensation may impact how and where listings appear. Investopedia does not include all offers available in the marketplace. Part Of. Related Articles. Technical Analysis Strategies for Trading Fibonacci Retracements. Technical Analysis Basic Education Introduction to Stock Chart Patterns.

Advanced Technical Analysis Concepts Market Reversals and the Sushi Roll Technique. Trading Strategies Fibonacci Techniques for Profitable Trading.

Advanced Technical Analysis Concepts Using Pivot Points for Predictions. Partner Links. Related Terms. Fractal Indicator: Definition, What It Signals, and How To Trade The fractal indicator is based on a recurring price pattern that is repeated on all time frames. Stated simply, in forex trading a fractal is a detailed, self-similar pattern that repeats itself, often many times over. The distinguishing characteristic of fractals in forex trading and elsewhere is their natural organic scaling when contrasted with ordinary geometric figures.

For example, doubling the length of one side of an ordinary geometric square will scale the area of that figure by four, since the square has 2 sides, and 2 2 equals four. In contrast, when the one-dimensional lengths of a fractal are doubled, the space contained within that fractal scales up by a number that is not a whole integer. Fractals predict reversals in current trends.

When viewed as a set of price bars on a chart, the most basic fractal pattern contains five bars or candlesticks with these characteristics:. When the lowest bar is positioned at the middle of a pattern, and two bars that have successively higher lows are located on each side of it, this signals the change from a downward trend to an upward trend;. When the highest bar is positioned at the middle of a pattern, and two bars that have successively lower highs are located on each side of it, this signals the change from an upward trend to a downward trend;.

Stated differently, when the forex fractal pattern shows the highest high at the center, and there are 2 lower highs positioned at each side, it signals a bearish turning point.

And, when the pattern has the lowest low at the center, and there are 2 higher lows positioned at each side, it signals a bullish turning point. Still, since most of the significant reversals last for multiple bars, the trend usually continues long enough for me to trade it.

Fractals work best for forex trading when used together with a momentum indicator. Along with fractal indicators, I also use an oscillator such as the CCI indicator to facilitate entering a forex trading position as early and safely as I can.

Alligator indicator lines confirm the direction and presence of a trend. Specifically, the Alligator indicator consists of 3 smoothed moving averages. Carrying the metaphor further, it can be said that when the 3 balance lines are intertwined or converged, the Alligator is asleep with its mouth is closed. This indicates that particular forex market is trading in a sideways range.

The Alligator fractal indicator shows trends in the following way: When the price is trading above the mouth of the Alligator, i. the green balance line is over the red line which is over the blue line, and all three are aligned and pointing upward, yet still below the price line, this indicator signals a clear uptrend.

Finally, once the fractal forex trading Alligator has sated itself, the green, red and blue balance lines once again converge and cross over, signaling the end of the trend. At that point, my mechanical trading system takes profits, and then begins to watch for the next fractal forex trading opportunity.

As well, I double-confirm the validity of Alligator signals by using the CCI oscillator. The teeth, depicted with a red line, shows a Smoothed Moving Average containing 8 periods, moved 5 bars into the future;.

The lips, depicted as a green line, shows a Smoothed Moving Average containing 5 periods, moved 3 bars into the future. For purposes of programming a mechanical trading system for fractal forex trading:. Forex markets show many false trends.

When using fractals, my strategy correctly identifies real trends and then follows them. Fractal forex tools such as the Alligator help my mechanical trading system reach through price clutter and focus on finding and trading the real trends. Fractals are an easy way to see or confirm trends on any time frame.

I program my mechanical trading system to check and see whether the fractals are showing lower lows and lower highs, or higher highs and higher lows. For my typical forex trading, I use fractals based on one-day, one-week, and one-month time frames.

The longer the time frame used to generate the fractal, the greater the reliability of the signals it produces. Also, the longer the time frame, the fewer the signals. Also, I program my mechanical trading system to calculate fractals in order to set trailing stops. Since fractals show changes in trends, they work well to trigger my mechanical trading system to exit from trades when very-short-term reversals threaten to eat up the profits from a trade. Beyond using the fractal Alligator indicator, fractal tools offer a great way to confirm Fibonacci signals.

Then, I open a position when the price touches the most-distant Fibonacci band, yet only after my mechanical trading system sees that a daily D1 fractal signal has occurred. The mechanical trading system exits the trade when a D1 fractal reversal occurs.

When using Fibonacci tools, fractals help pinpoint tops and bottoms with great accuracy. This gives me the confidence to trade at the right Fibonacci level. In order to double-check the signals generated from fractal indicators, my mechanical trading system uses other indicators such as the CCI oscillator to confirm fractal signals before trading. And, as with any type of trading method, use appropriate risk management measures to ensure that drawdowns are reasonable.

Fractals can be plotted in multiple time frames and used to confirm each other. One simple rule is to only trade short-term fractal signals in the direction of long-term fractal signals, since long-term fractals are the most reliable. Use another indicator for safety such as the CCI oscillator to confirm the signal.

Fractals offer a set of powerful tools that you can use to strengthen your profits. Since mechanical trading systems are able to calculate fractal values and act on them quickly, there are plenty of fractal-based trading opportunities. My own personal favorite is the Alligator indicator, yet fractals also work well with Fibonacci indicators and other trading strategies. In fact, fractal tools enjoy a relatively small yet devoted following among successful traders.

How do you use fractals in your trading? Share your thoughts on fractals below. Source: Fractals in Forex Trading. Never miss the opportunity to learn powerful new insights. Join the thousands of other Forex Alchemy subscribers and we will keep you informed with cutting edge articles, tips, tools and analysis from across the trading industry to power you forward on your trading journey.

The current article will acquaint you with a very reliable trading strategy based on the fractals indicator, whose role is to help predict potential price reversals. However, despite this trading systems satisfying performance, as we know, nothing in Forex is risk-free and each indicator can produce a false signal.

In our case, a broken fractal indicates that the price might continue to move in the same direction. A fractal can be broken by both the body or the shadow of a bar which formed later. Also, it is very important to know that a fractal is confirmed valid only if two bars form and close after it, otherwise it could disappear. For this strategy we will be using the concept of multiple time frame analysis, which is based on determining the general trend on a higher time frame and then dropping to a smaller chart to find the best possible entry points.

In our case, we choose to determine the larger trend on the 1-hour time frame. Based on fractals, the trends direction depends on which type of fractal up or down has been broken last. Keep in mind that it is not the arrow itself that needs to be broken, rather the high or the low of the bar which is marked by it. Also, it does not matter whether the broken fractal is positioned before or after any other opposite fractals — if an up fractal is before a down fractal, but it gets broken and the down fractal remains intact, this indicates that the trend is up.

Check out the following screenshot. We have marked the last three fractals. The first fractal was up, while the second was down and the third was up. However, like we said, the order of formation is not important, rather which fractal was broken last. As you can see, the fractal at bar 1 was broken first by bar 3 , but the price then reversed and edged lower, breaking the down-fractal at bar 2.

And because bar 2 was the last broken fractal, it implies that the market is headed downwards. Having determined the general trend on the higher time frame, you should now switch to a lower time window to receive more accurate entry signals — we will use the minute chart. We already know from previous articles that the best place to enter in the direction of the trend is at the end of a pullback. Having learned from the 1-hour time frame that the market is moving down, as we drop to the minute time frame, we should wait for the price to make a move against the larger time-frame trend, thus rise, and then go short.

We need to wait for a minute fractal to form in the opposite direction of the hourly trend and as soon as it is broken, we can prepare to enter in the direction of the larger trend. Bear in mind that this could take some time and you need to keep track of the general market conditions. If they change for example if the hourly chart trend reverses up , you should adjust accordingly and switch your entries direction to bullish, instead of bearish.

In case the larger-time frame conditions do not change, we remain in waiting mode for a counter-trend fractal to form. Since we used a downtrend for our example, we need to wait for an Up-fractal to form and to get broken. As soon as that happens, we may proceed with initiating a trade. The market must be entered on a pending sell stop order the same direction of the general trend.

Also, it is of utmost importance that no major economic news are released after youve placed your pending order, since they can stir the markets and render our trade unsuccessful.

If you are already in position, you should close it before the data is released. Your profit target should be the next pivot point beneath the entry level, or if it is too close to it less than 10 pips — the next pivot point.

Since we are entering short, our profit targets would be the pivot support levels. See the example below. The yellow rectangle represents the minute breakdown of bar 3 on the first screenshot. Once we have dropped down to the minute chart, and we know that the general trend direction is bearish, we want to wait for the break of an Up-fractal.

The first Up-fractal was formed at bar 1 , but it was not broken. A second Up-fractal occurred at bar 2 and this time it was broken, at bar 3 at 1. Next, we proceed with placing our pending sell stop order, our stop-loss and profit-target.

We will need to enter at the low of the most recent down-fractal bar, as visualized by the green horizontal line at 1. Our stop-loss is placed several pips above the high of the bar with the broken Up-fractal or just at the top of the fractal itself , marked with the red horizontal line at 1.

In order to determine our profit target, we need to have calculated the days pivot points. Having done the math, we determine that the central pivot point is at 1. Keep in mind that because the central pivot point for a certain day is calculated on the base of the previous days high, low and close, values will change over midnight.

Thus, in case you are holding a position open at that time, your profit target will need to be adjusted accordingly. Because your sell stop order is pending and it will take time to get filled, market conditions can change in the meantime which will require certain actions to be taken. Also, if the price initially moves up, then moves back down and forms a new Down-fractal before your initial pending order is triggered, you need to move the order to the low of the new Down-fractal bar, regardless if it is above the old one.

Once your sell stop order has been triggered and you enter the market, you need to trail your stop-loss as the price moves in your favor. The rule is to move your stop-loss to the tip of the next Up fractal which forms beneath the initial broken Up-fractal.

If a higher Up-fractal forms, you need to ignore it. You need to continue doing so until either your profit target is reached or the latest stop-loss has been hit and you exit the market. Trading Flags and Pennants Formations. Trading Forex Using Fractals This lesson will cover the following What are fractals What do they tell us How can we trade based on fractals.

Necessary cookies are absolutely essential for the website to function properly. In order to determine our profit target, we need to have calculated the days pivot points. Swing highs are analyzed to show trend direction and strength. Using fractals in Forex trading for technical analysis, would allow a trader to fine tune a entry with their strategy. You can also use fractals to enable you to place stop losses. One simple rule is to only trade short-term fractal signals in the direction of long-term fractal signals, since long-term fractals are the most reliable.

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