HOW TO USE FRACTALS IN FOREX
Trading with
fractals is extensively used by the large market players and it is the best
indicator of the fractals’ reliability. The combinations of fractals have such
characteristics as self-similarity, scaling and memory of the «entry
conditions», and, therefore, they can be used successfully for making price
forecasts.
The French
economist and the mathematician, the creator of fractal geometry Benoit
Mandelbrot was the first person who had paid attention to the repeating price
formations. The analysis of the prices for cotton for the period of more than
100 years had led to the creation of the effective trade technique for the
first time mentioned in the well-known «Trading chaos» by Bill Williams. It was
Williams who for the first time suggested that the market was chaotic,
multiple-factor and self-regulating system and cancelled all linear models.
HOW TO USE
FRACTALS IN FOREX
Fractal
links of exchange prices and the repeating structures have been confirmed by
the results of computer modeling.
The fractal
(from Latin fractus) means a steady scalable design of irregular shape emerging
on any data. The trade fractal in the financial market is the candle pattern
formed by at least 5 (or more) candles, max/min of the central candle of which
exceeds the extremes of the neighboring candles.
Emergence of
fractals means the beginning of a new price pyramid and is considered as a
trading signal
A fractal up
(or a signal to enter to buy) is the set in which (at least) 5 consecutive bars
form a pattern, where the highest maximum is shown by an average candle.
A fractal
down (or a signal for position to sell) is the reverse pattern made up by five
(or more) consecutive candles, the average from which shows the lowest minimum.
WHAT IS THE
FRACTAL ANALYSIS AND WHAT’S ITS VALUE?
The aim of such analysis is «to notice» in time and
correctly to treat fractal designs in conjunction with other market data
regardless of whether they are fundamental and technical, volume and temporary.
The set of the real fractals is very dynamic. It can vary depending on quantity
and structure. For instance, emergence of max/min for a fractal need not be
consecutive. The main thing is that one of the central bars has to show an
obvious extreme. Therefore, non-standard combinations can also be used as
fractals
If the
extremes have appeared at several bars of a pattern, then only the last will be
taken into account as a trading signal. Current price movement 1 point higher
the level of the fractal up is the breakthrough of the sellers, while if it is
1 point below the fractal down, it is a breakthrough of the buyers. The approximate
scheme of an entry is shown below.
The
fractal’s emergence means the strong turning impulse confirmed by preliminary
movement at formation of the pattern. The strongest signal is just after its
emergence, and the same group of candles can be used both for upper and for the
lower fractals. Pointers of the appeared fractals are not redrawn.
The border
of the upper fractal is the maximum, while the border of the lower is the
minimum. In this case of fractal’s trading there shall be an entry in a
direction opposite to the created fractal, stop is 1-5 points higher/lower than
the border of key bar. In case of formation of an opposite fractal, the current
trading signal is cancelled.
CONDITIONS
OF THE FRACTAL’S USE IN FOREX TRADING
The
emergence of two multidirectional fractals close to each other (sometimes in
one candle) is called a fractal start: further the market is assumed to make
the decision for the benefit of one of the directions.
When
carrying out the fractal analysis we pay attention to the standard factors:
The longer
the period of formation of fractal structure, the more reliable the trading
signal given by it.
The less
timeframe, the more ‘false’ fractals and breakdowns will appear. Sometimes the
expectation of the moment when the ‘correct’ fractal is created, leads to the
omission of the good point of entry.
In case of
the emergence of several multidirectional fractals at some level with the
subsequent breakdown of the level it is possible to expect a strong and long
trend in the direction of breakdown.
The fractal
represents the beginning (or the end) of some pulse movement and, therefore, it
can quite be considered as a wave structure. It is possible to apply fractals
in the wave analysis only on the periods from the D and above. In case of the
determination of ‘validity’ of breakthrough of a fractal it is important to
carry out correctly the analysis of the candle structure on which this fractal
was formed.
If closing
of a breakthrough candle happens far beyond the accumulation level, then it is
possible to open in the direction of breakthrough on a smaller timeframe.
If the
candle design represents the pivoting model, then with a high probability it is
possible to expect the emergence of the return fractal and transition in flat.
The true
breakdown of a fractal on any timeframe shall be confirmed by certain volumes.
A firm breakthrough candle but with the small volume appears to be an unstable
signal. Also for an assessment of volumes it is recommended to use standard
designs of Price Action.
Nowadays
nobody looks for the trading fractals on a price chart manually. For these
purposes a standard package of any trade platform includes the Fractals
indicator. We will offer two popular trading strategies on its basis.
STRATEGY
ALLIGATOR + FRACTAL
Regular
Fractals and Alligator indicators with standard settings are necessary for
using this strategy. We trade all major currency and future assets: for the
analysis and an entrance - M15, for maintenance – from H1 above (for futures -
from D1 above).
The entry
scheme for fractals Forex trading is shown below. Stop losses are on an
opposite extreme from 2 last fractals: purchase is below the lowest, sale is
slightly higher than the highest. We hold the transaction until the return
fractal has been formed. In a flat we ignore all fractals.:
While making
the fractal market analysis using this technique, it is necessary to remember
that:
it is
impossible to trade against the direction of the Alligator;
the first
fractal after the Alligator exit from hibernation is the warning signal;
in case of a
long narrow flat it is possible to put the pending orders beyond the borders of
small fractals;
the red
Alligator’s line is the line of dynamic stop;
in case of
stop closure the following entrance will be only after emergence of the next
fractal.
WILLIAMS
FRACTALS TRADING STRATEGY WITHOUT ADDITIONAL INDICATORS
Any currency
asset of a middle volatility subject to steady trends is traded: EUR/USD,
AUDUSD, GBP/USD. The period for the analysis and entry is D1. Stops and profits
are usually not put, at the end they are closed manually.
If there is
a fractal up it is a sale, in case of the lower fractal there is a purchase. It
is possible to enter by a market order, and also by the pending orders:
purchase -
BuyStop is 2-5 points higher than a max of the second candle following a key
candle of a fractal;
sale -
SellStop is 2-5 points lower than a min of the second candle following the key
candle.
Shortcoming:
the considerable part of the main movement passes by in the expectation of the
‘correct’ fractal.
RESULT
Fractal
trading is only one of the evaluation methods of the market which is effective
during the periods of a stable trend, while in a wide flat can be unprofitable.
It is necessary to understand that the fractals trade strategies were initially
developed for the stock market which was less volatile and more predicted.
Unusual market situations arising in Forex often cause failure in calculation
of fractals construction, and also emergence of ‘false’ or difficult for
recognition signals. However, fractals in conjunction with the trend
instruments represent the powerful tool of a technical analysis and can be the
basis of constructing the steadily profitable system.
cr.
https://www.forexchief.com/library/forex-strategy/forex-fractals-strategy/
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