Creating trend line points
As well as support and resistance levels you can also connect the points to draw trend lines. The breaking of these trend lines can indicate reversal areas and trade entry areas. Many other traders use these same trend lines in their analytics which reinforce their relevance.
The basics of the Fractals indicator
The indicator will create Fractal point tops and bottoms where the market reverses.
In order for a top fractal to form, there needs to be a series of 5 consecutive bars where the middle bar is the highest surrounded by two lower neighbouring bars on each side. A bottom fractal will be the opposite:
The fractals can share the same candles to create the series of 5 so 2 may appear in short sequence.
How to trade using Fractals
Finding breakout points
Fractals are created when the price fails to hold a new high or low and reverses, so once the level is then broken it indicates further strength coming.
You would then look to place trades just beyond these breakout levels.
The basic principle is the indicator helps to find support and resistance levels.
The trade should then remain in place until the pending entry order is triggered or a new fractal is formed. Consecutive fractals going in the same direction that are formed after the trade has opened can be used to add further positions.
Bill Williams' Chaos Theory
The fractal indicator is only one of five indicators that Bill Williams’ used to create his trading system. According to his system, fractals have to be used in combination with the Alligator indicator.
• If a Buy fractal is above the red Alligator line traders should place a buy stop order a few pips above the high of the buy fractal;
• If a Sell fractal is below the red Alligator's line traders should place a sell stop order a few pips below the low of the sell fractal.
• Don’t take any long positions if a fractal is created below the red line.
• Don’t take any short positions if a fractal is created above the red line.
First introduced by Bill Williams, it is a simple and versatile indicator that can be used as a stand-alone indicator or in combination with other indicators. The indicator looks for reversal points to help find breakout areas or confirm a trend.
We will also look at Bills own strategy to use fractals in trading, which we going through after the basics.
Fractals as trend confirmation
In an uptrend, we will find that there are more top fractals broken than bottom fractals. In a downtrend, it will be the reverse. As the trend up or down completes a successive break and advance of new fractals will be seen. Should the break of the previous fractal fail, indicates a sign of price consolidation.
Fractals for trend consolidation
If the price fails to successfully advance past the previous fractal it can look to consolidate. If the rebound fails to break at the opposite fractal the market will move into a ranging market until a new breakout occurs.