Among the commonly used indicators that display reversals in a chart is the Fractal Indicator. What is the Fractal Indicator and how can this reversal indicator be used to trade continuing trends? Here’s what you need to know about this indicator and how it can help you become a better trader.
What is the Fractal Indicator?
The Fractal indicator, also known as “Williams Fractal Indicator” credited to its developer – Bill Williams, is a technical indicator that aims to identify trend reversals in a chart. In a mathematical sense, fractals are geometric figures or shapes that repeat infinitely. In the area of trading, the fractal indicator shows the tops and the bottoms of a trend or a price swing.
It is determined by assessing the recent 5-candles of the chart, where the middle or third candle is said to be at the lowest or the highest among the 5 candles. If a 5-candle formation shows to have a middle candle that is higher or lower than the other 4 candles surrounding it, the indicator displays an arrow above or below it. Bullish fractals show a green arrow on top of the middle candle, while bearish fractals show a red arrow below the middle candle.
To use the Fractal indicator in Pocket Option, simply look up the indicator from the list of choices from the indicator tab on the upper left corner of the screen.
Fractal Indicator Trading Strategy
So how can you use the Fractal Indicator to improve trading results? We’ve mentioned earlier that the Fractal Indicator is an indicator that reveals reversal points on a chart. However, the indicator does not guarantee the continuation of the new trend. There is still a possibility that the trend will go back to its former trend or direction. Instead, the Fractal indicator can be used to identify breakout levels using significant support and resistance levels.
The Fractal Indicator trading strategy applies two simple steps. The first is to determine support and resistance levels by activating the Fractal indicator. These support and resistance levels are also those which come with an arrow – arrow on top of the candle for resistance levels, and an arrow below the candle for support levels.
The second is to wait for the price to break through the support and resistance levels established by the indicator. Price breaking through the resistance level is a buy signal (as shown on the image), whereas the price breaking through the support level is a sell signal or signal to go ‘short’.
Ideal entry and exit levels would be at the high or low of the candle that broke through the break-out level – as shown by the yellow line and arrow on the image.
Fractal Indicator Strategy on Charts
For us to have a better understanding of this strategy, let’s look at a few trading examples.
The image below shows a chart for Bitcoin in a 1-minute trading period. The green arrows show the ideal entry levels on which the price broke through resistance levels drawn from fractal highs. On the other hand, the red arrows show the ideal exit levels on which the price broke through the support levels drawn from fractal lows.
Here’s another application of the Fractal Indicator strategy on a downtrend market by EUR/JPY Forex trading. This example shows a series of price breakouts as the price breaks through the support levels – as shown by the yellow lines and arrows. The lines show the ideal exit levels or ‘short’ levels.
Now the Fractal Indicator trading strategy can only be effective if a trader can effectively identify trends in the market. Being able to identify the current trend can aid you with determining possible future price direction. For example, if you’re trading at a downtrend market, your focus should be breakouts at the support levels – which in turn will provide you with entry levels for short trades. On the other hand, uptrend markets’ focus should be towards breakouts at the resistance levels – for long trade entry levels.
Likewise, the strategy is more effective when trading strong trends. Markets under consolidation tend to display much lesser price swings compared with strong trends. Furthermore, the strategy aims to find opportunities for significant price movements – consolidation trends tend to have minor or little price movements thus there is not much opportunity to enter any trade.
Our final thoughts
The Fractal Indicator trading strategy is a simple yet powerful approach when it comes to taking advantage of trend reversals and price swings. It only requires one indicator and a good understanding of support and resistance levels.
If you’re looking to master this level, all there is to do is to practice using it on actual trades. Pocket Option comes with a demo account that allows you to trade real-time using virtual funds. Only through diligent practice and a good understanding of the methods and strategies you use can you be a better trader.
If you think to find this article helpful, do share it with others. For questions, comments, and suggestions about the Fractal Indicator Trading Strategy, please do let us know – we’d love to hear your thoughts.
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