A fractal is a mathematical set that exhibits a repeating pattern displayed at every scale. This might sound complicated, so let's break it down. Firstly, think of a fractal as a curve or geometrical figure. An object is fractal if the same pattern occurs at every size. In essence, fractal explains natural objects and chaotic phenomena such as snowflakes, crystals, and even galaxy formations.
Fractals are connected to the "chaos theory", which is a branch of mathematics focused on the behavior of dynamical systems such as weather, climate and other natural and even artificial i. Okay, now that we understand fractals a bit better, how exactly do they tie in with the markets? Many traders see the financial markets—such as Forex, CFD and commodities markets—as fractal because the behavior of the markets is like a dynamical system that repeats on all time frames.
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Simply said, I think that most traders will agree that market patterns are continuously repeated :. Chart patterns, candlestick patterns, wave patterns and many more patterns repeat themselves regularly and confirm their Fractal nature. Legendary trader Bill Williams took the fractal and chaos concepts and transformed them into a Fractal indicator which can actually be applied directly on a chart. It's important to realise that the inventor of the Fractal indicator, Bill Williams, tested the Fractal concept on daily charts in the commodity markets. His research came to the conclusion that the best Fractal value was found via the number two.
This is why Fractals appear on the chart when two candles to the left and two candles to the right are lower or higher than the candle with the Fractal. You can read more info. Generally speaking, I think that this particular setting has value for all time frames and financial instruments.
However, after many years of research, I started to notice that the best Fractal value for the Forex market was 5 or 6 for the rest of the article I will refer to 6 and The Fractal value of 6 is especially beneficial for intra-day charts of the Forex market, but is equally useful for long-term charts too.
The value of 13 will be explained in a later article. The MT4 charts do not allow traders to change the Fractal indicator so I asked a programmer to make a custom Fractal indicator for my own trading. You can receive a free copy by writing us here please add a reference to this article. Intraday charts move rather quickly compared to daily charts. Using a Fractal of 2 makes sense on slow-moving charts but not when price moves quickly and impulsively. That is why a Fractal value of 6 has more relevance for the Forex market and lower timeframes.
Once a Fractal of 6 occurs, I feel more comfortable to conclude that the momentum swing is probably completed for a while. At this point, the market will most likely show a reversal or correction more explained in next week's article. The 6 Fractal value is a key part but not the only aspect of what I call the "time factor" pattern. Since a fractal is a five-candle pattern, the fifth candle in the set must close and complete before any trading decisions can be based on that particular fractal. This is because the price can move during the time that the fifth candle is forming.
If price moves either above the higher high or below the lower low, while the pattern is still forming, the fractal indicator will disappear from your price chart. So you must wait for the pattern to complete in order to make sure that the fractal is confirmed. One way in which traders do this, is by looking for broken fractals.
How to use fractals in trading
A fractal is considered broken when a fractal has been confirmed and then the price breaks through either the high or the low of the pattern. If the price breaks an up fractal then the direction of the market is considered up and if the price breaks a down fractal then the market is considered down. The image below demonstrates how this appears on a chart when the price has broken the most recent down fractal.
As you can see in the chart above, the last fractal to be broken was a down fractal. This suggests the market is bearish, meaning traders should be looking for selling opportunities. The next example shows when the price has broken an up fractal:. The chart above demonstrates that the most recent up fractal was broken. This suggests the market is bullish, meaning traders should be looking for buying opportunities.
Alligator and Fractals Trading Strategy | Forex Trading Big
Fractals tend to be more reliable indicators of direction when used with longer time frames than with shorter time frames. For example, when entering a short position you can use the most recent up fractal to place your stop loss. Traders usually use the tip of the actual fractals indicator for this, rather than the candle itself, as shown on the chart below:. As you can see above, despite the fact that there are many up fractals on the chart, the most recent one is used to place the stop loss.
When entering a long position you can use the most recent down fractal to place your stop-loss order, as shown on the chart below:.
Profitunity Trading System.pdf - Trade2Win
Tradimo helps people to actively take control of their financial future by teaching them how to trade, invest and manage their personal finance. Risk warning: Trading in financial instruments carries a high level of risk to your capital with the possibility of losing more than your initial investment. Trading in financial instruments may not be suitable for all investors, and is only intended for people over The Alligator indicator trading strategy was vastly used in the Profitunity trading system by Bill Williams.
In our other post on Profitunity indicators , readers can know more about this strategy. Overall this strategy is a trend following strategy and one can trade it with much accuracy if he considers fractal breakouts in the same direction of the Alligator indicator trend. The book is available in both Kindle and Hard Cover format. We here present you a sample chapter eight of this book. You can download the book from the below. Download NOW. The Alligator indicator is a trend following indicator. This is a combination of 3 moving averages. Fractal is another important component of this.
We can trade this indicator with high accuracy.
How to attach the Alligator indicator in the chart?
Thank you for the strategy explanation. I am stuck with it. Any kind of help would be much appriciated. This site uses Akismet to reduce spam. Learn how your comment data is processed. What is alligator in stock market? How do you read an alligator indicator? Alligator Trading System.
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Alligator and Fractals Trading Strategy
Krishna Kishore Reddy Arumalla October 16, at am. Dear Indrajit, Thank you for the strategy explanation.
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Thanks Krishna Reply.