WHAT ARE FRACTALS IN FOREX TRADING?

👋 Hello forex traders!
It is unlikely that you will find a single beginner in the Forex market who would not know what a fractal is. And even outside the market, many people have heard about this concept. Fractals have been known for almost a century, are well studied and have numerous applications in life. Fractals have been used on financial markets for quite a long time - even classic trading strategies contain references to them. For example, the famous trading strategy of Bill Williams Profitunity uses fractals as one of the elements of the system.

To begin studying this method of analysis, we need to define what a Fractal is. Here is the most complete and understandable definition: "A fractal is a set that has the property of self-similarity. An object that exactly or approximately coincides with a part of itself, i.e. the whole has the same shape as it or more parts. In our familiar markets, this concept is slightly modified, but the concept remains the same."

Transferring this definition to price charts, we can get approximately the following: "A fractal is a constantly repeating pattern that is not included in any list of common patterns. In other words, if you watch the chart of a certain instrument for a very long time, you will start to notice the fact that its movements in a certain period of time are constantly repeating. This pattern was discovered by the well-known Bill Williams. This trader claimed that the whole market is chaotic and only sometimes it changes into a stable and bright trend."

Why Fractal Analysis Is Necessary 📊
In fact, the trader himself determines the necessity of this kind of analysis. If you have a perfectly working and profitable strategy, then probably this post is not for you, but if you have some problems with finding a profitable trading strategy, then you can read to the end so that this post will give you an idea. I have not been able to find any clear information as to why it has been noticed only now, but I personally believe that it is due to the fact that more and more traders started to spend a long time at the monitor and notice some patterns and features of each currency pair. Translating all of the above into simple language, fractal analysis is needed to find the biggest patterns in the market and apply on.

“Once is a fluke, twice is a coincidence, and three times is a pattern”.

How To Apply In Trading 📈📉
Now that we have sufficiently understood the general concepts of Fractal, it is time to understand how this technique is applied in the financial markets and learn how to trade using it. Let's start with the fact that fractal structures were originally found with the help of machine running of charts and finding certain patterns. That is why it may be difficult to find fractals with your own eye. But we are glad that we live in the 21st century and all developed platforms have such indicators for a long time. Immediately after applying this indicator, the chart will look like this:

Fractal Start
A fractal start is a situation in which after a fractal in one direction, a fractal in the opposite direction is formed.

Fractal Signal
After the fractal start, on its reverse side, the appearance of the fractal signal takes place

Fractal Stop
The fractal stop is located behind the farthest of the two extreme fractals. Using this technique allows you to minimize the number of stop-losses.

The Practical Use Of Fractals 💡
1. Method of breakouts, often indicating the continuation of the existing trend. To enter a trade, a pending stop order is set at the breakout point of the nearest fractal to the price.

2. It is not always possible to determine how accurately these levels were built. Bill Williams' fractals are a tool to effectively identify significant support and resistance levels.

3. Fractals can also be used as a useful method of identifying reference points when plotting trend lines. These anchor points can serve as important indicators of market behavior.

4. Fractals can help traders identify the prevailing trend in the market. Identifying a trend is a simple process if you take into account the definition of an uptrend as a sequence of increasing local highs and lows, while a downtrend is characterized by a series of decreasing extremes.

5. If the price does not overcome the previous fractal, it may indicate the emergence of a sideways movement. To confirm this signal, it is necessary to wait for the formation of the opposite fractal.

Advantages And Disadvantages Of Fractal Analysis ↕️
Like other techniques, fractal analysis has both disadvantages and advantages. For its effective use it is necessary to be able to analyze several timeframes and synthesize the overall picture. Market entry should be determined by the trend on the higher timeframe, because the Bill Williams system is trending.

In conclusion, the fractals provide numerous potential entry points on the chart, catering to different preferences and often appearing quite reliable. However, it is essential to recognize that this method of analysis is not simple or unambiguous. Consequently, it is not recommended for beginner traders to use it as the sole factor in decision-making. The Fractal indicator's effectiveness is dependent on its use in conjunction with other indicators on time intervals from an hour and above. Strategies that incorporate the Fractals indicator must analyze several timeframes. Despite these considerations, the indicator should not be dismissed, as it can provide valuable support when used in combined strategies.

Traders, If you liked this educational post🎓, give it a boost 🚀 and drop a comment