The fractal indicator is a simple price pattern that can often be found in the financial markets. Outside of the trading area, a fractal is a geometric pattern that repeats itself across all time frames. The fractal indicator was created from this concept. The indicator separates potential turning points on the price chart. Then draw arrows to show the pattern. A bullish fractal pattern signals a possible upward movement. Conversely, a bearish fractal signals a possible price decline. A bullish fractal is marked with an arrow pointing downwards and a bearish fractal is marked with an arrow pointing upwards.
Source: Tradingview
The fractal indicator generates regular signals. The existence of the fractal is not necessarily important as this pattern is very popular.
Fractal indicates the possibility of a trend change. This is because the fractal is essentially showing a “U-shaped” price. In a bearish fractal, the price moves up and then down, forming the letter U. A bullish fractal occurs when the price falls but then starts to rise and forms the letter U.
Because fractals are so common and many signals are not reliable entry points, fractals are often filtered using another form of technical analysis. Bill Williams also invented the alligator indicator, which helps separate trends. By combining fractal and trend analysis, a trader can choose to only trade on bullish fractal signals while the price trend is up. If the trend is down, you can easily take short trades based on bearish fractal signals.
Fractal can also be used with other indicators such as pivot points or bearish Fibonacci levels. Fractal will only execute when it matches one of these indicators and is likely to be the long-term price trend. For example, let’s say a crypto is trending up. The price falls again and hits the 50% Fibonacci retracement. Since the trend is up and the price is near the bearish Fibonacci, traders will enter a trade if a bullish fractal forms.
The fractal indicator is unique in that it identifies a price pattern and marks it on the chart. Fractal is a specific five bar pattern. Patterns can also be drawn on the chart, although they are not limited to five price bars. They also include a variety of shapes such as triangles, rectangles, and wedges. While some software marks the pattern on the chart, most chartists find and separate the chart pattern manually.
The main problem with fractals is that they appear too strong. They happen a lot and trying to trade them all will quickly deplete your trading account due to trading losses. These are known as false or “whip” signals. You should therefore filter the signal with another indicator or another form of analysis.
The indicator arrows are usually drawn at the top, bottom, or middle point of the fractal, not where the fractal will be completed. Hence, arrows can deceive the eye. Since the pattern actually completes two bars to the right of the arrow, the first available entry point after seeing the arrow is the opening price of the third bar to the right of the arrow.
There are two unrelated forms of fractal analysis that are widely recognized by traders:
Fractal in technical analysis terms is a five bar / candle trend reversal pattern. For a bullish reversal fractal pattern:
The following chart illustrates a bullish fractal pattern:
A bullish reversal fractal pattern indicates the end of a short-term downtrend and the beginning of a new uptrend. Traders can use this pattern as a signal to enter a long position or as a signal to exit an existing short position.
Bullish reversal fractal pattern
Many traders use fractal signals in conjunction with oscillators such as the Stochastic Indicator or the Relative Strength Index (RSI) to confirm bullish buy signals. In this regard, a buy signal fractal is considered more valuable if it is accompanied by an oversold signal.
Bullish reversal fractal pattern
For a bearish reversal fractal pattern:
The following chart illustrates a bearish reversal fractal pattern:
A bearish reversal fractal pattern indicates the end of a short-term uptrend and the beginning of a new downtrend. Traders can use this pattern as a short entry or exit signal from an existing long position.
A bearish reversal fractal pattern
Traders often use fractal signals in conjunction with oscillators like Stochastic or RSI to confirm bearish sell signals. In this regard, a sell signal fractal would be considered more valuable if accompanied by an overbought signal.
A bearish reversal fractal pattern
Another unrelated interpretation of fractal analysis in retail is multi-timeframe analysis. In this regard, traders can use fractional time frames in their analysis to provide forecast views and trading ideas.
For example, a trader can use the daily or weekly timeframe to get a broader view of the market they are trying to trade. Traders then look at smaller time frames such as the 1-hour or 15-minute charts to adjust entry and exit points.
You can refer to the simple fractal trading strategy as follows:
1. Identify the main trend on the daily chart
2. Use the 1-hour chart to identify entry and exit points
3. Entry signals in the 1-hour time frame are only taken into account if they match the trend derived from the daily chart.
4. The counter trend signals identified in the daily time frame are not signals for trading against the trend, but rather an indication of the exit from current positions.
There are 2 common trading concepts in technical analysis related to fractals: reverse fractals and multi-timeframe fractals.
Fractal reversal pattern:
Fractal: Multi-Timeframe Analysis
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Thuy Trang
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