Guide to the Fractal indicator in Forex trading

There are two types of indicators in Forex: leading and lagging. Lagging indicators are used to confirm patterns and market trends and help identify future patterns as they emerge. Leading ones send predictive signals before reversals and new trend formations happen.

Fractals are five-bar reversal patterns that are used to identify recurring patterns on a candlestick chart. FX fractal indicator is easy to use, and often it’s used in combination with various indicators and tools.

There are many trading indicators and each should be applied properly to produce desired results. In this fractal indicator guide, we’ll find out what they are and how to use them in trading.

Fractal indicator overview

Fractals are widely used observable patterns across multiple asset classes, such as forex, stocks, crypto, commodities, etc. Understanding the mechanics and core features of fractals can help traders take advantage of a widely-regarded technical indicator:

• Fractal indicator fx traders use is a lagging indicator that consist of five bars and show possible trend changes on the market
• The alligator and awesome oscillator are two of the most commonly used indicators alongside fractals
• Fractals can work on multiple different timeframes. The most popular ones are 15-minute and 1-hour timeframes
• Bullish fractals have a shape that resembles the letter “U”, while bearish fractals look like an upside down “U”
• Some long-term traders use fractals in conjunction with the Fibonacci retracement levels and pivot points

Technical details of the fractal indicator

Fractal indicator for trading fx signals possible trend changes. Fractal signals are relatively frequent. Therefore, many traders refrain from using very tight timeframes when applying fractals on a price chart.

To better understand how to use fractals in forex, traders must first understand what they are, how they work and how to calculate them.

Understanding fractals

Fractals consist of five bars that provide hints toward possible trend reversals. Two types of fractals can appear on a chart, which are also shaped differently:

• A bullish fractal happens when a low candle is wedged between two higher low candles. Bullish fractals have a distinct shape that resembles the letter “V” or “U”. Bullish fractals are marked with a downward facing arrow
• A bearish fractal happens when a high candle is wedged between two lower high candles. Bearish fractals look like the inverse, or upside down versions of the letter “V” or “U”. Bearish fractals are marked with an upward facing arrow

While the fractal pattern consists of five bars, the arrows are placed on the middle bar. Traders cannot see the arrow unless all five bars have been formed – making the fractal a lagging indicator.

Due to the fact that fractals occur frequently, especially on shorter timeframes, traders often use the alligator indicator alongside it, which uses multiple moving averages to isolate trends.

Fractal formula and calculation

To calculate fractals, let’s look at the fractal indicator forex trading formula and the required steps:

Bearish fractal =

• High (N) > High (N – 2)
• High (N) > High (N – 1)
• High (N) > High (N + 1)
• High (N) > High (N + 2)

Bullish fractal =

• Low (N) < Low (N – 2)
• Low (N) < Low (N – 1)
• Low (N) < Low (N + 1)
• Low (N) < Low (N + 2)

Where:

N = High/Low of the current candle

N – 2 = High/Low of the candle two periods to the left of N

N – 1 = High/Low of the candle one period to the left of N

N +1 = High/Low of the candle one period to the right of N

N+ 2 = High/Low of the candle two periods to the right of N

How to calculate the fractal:

• Find the N point on the chart
• If there are two lower high points to the left of the high, or two higher lows to the left of the low, this could be a pattern
• If two lower highs follow the high, a bearish fractal is complete. When two higher lows follow the low, a bullish fractal is complete

Once a fractal is complete, traders can choose whether to open a long or short position to enter the market.

Limitations of fractals

While useful tools in their own right, fractals are far from perfect. They can be highly prone to false signals, especially on tighter timeframes.

Fractals have to fully form before traders can use their signals. A failed fractal could also be an indicator of sorts.

For example, the fifth bar of a bullish fractal could show a new low, instead of a high. This can indicate that the bearish run is likely to continue, and traders can use this information to their advantage.

The primary disadvantage of using fractals is the relatively high frequency of signals, which can often be false and misleading to traders.

Practical application of the fractal indicator in forex

To better understand how fractals work in practice, let’s look at the fractal indicator example.

CHF/JPY

The 1-hour timeframe shows many bullish and bearish fractals on the CHF/JPY chart. This is one of the reasons why most traders use fractals with other indicators, such as pivot points, and use even longer timeframes than 1 hour.

Let’s look at the same chart with a 3-hour timeframe and pivot points.

The pivot points add support and resistance levels to the chart, which can make it easier to tell true and false signals apart. Bullish fractals that break the pivot lines are solid evidence that a bullish trend is well and truly present, while bearish fractals that break below pivot lines can signal traders to go short.

The fractal indicator is also readily available for MetaTrader 4 users. Go to the ‘Insert’ menu, choose “Bill Williams” from the drop-down menu and select “Fractals”.

The properties of fractals can be customized by right-clicking on the indicator.

History and other useful details about fractals

Fractals were developed by Bill Williams, a renowned trader. The indicator is often referred to as the Williams Fractal. Williams outlined his idea in the book “Trading Chaos”, noting that the fractal indicator had its roots in the mathematical chaos theory.

In mathematics, fractals represent any kind of recurring pattern. Therefore, fractals are pattern recognition indicators that use past price bars to send out bullish and bearish signals for traders to take advantage of.

FAQs on the fractal indicator in forex

Does fractal indicator work on MT4?

The fractals indicator is readily available for MT4 users. Traders can go to the ‘Insert’ tab, select ‘Bill Williams’ from the drop-down menu and select ‘Fractals’. The indicator will promptly appear on the price chart.

Do day traders use fractal indicator in fx?

Fractals are not very useful for day traders, as they send out many signals that can lead to false positives, which can mislead traders into opening unfavorable positions. Longer timeframes are advisable for traders who wish to use fractals for full effect.

Is fractal a good indicator for forex trading?

Fractal can be a solid indicator for traders with slightly longer timeframes, which makes fractal signals more reliable. Fractals are often used alongside the alligator indicator, which helps traders that want to tell apart false and legitimate signals.