A fractal is a technical analysis indicator developed by the famous American trader Bill Williams for his unique Profitunity trading strategy. However, the indicator created by Williams only indicates fractals on the chart without performing any additional calculations, therefore, theoretically, any trader can find these patterns “by eye” himself. But what is a fractal, how exactly is it defined on a chart, and what is its use for a trader?
Table of contents:
- How to install and configure the indicator
- Simple trading strategy
- Fractal strategy of medium complexity
- Professional strategy with Fractal indicator
The essence and features of fractals
A fractal as a pattern is five or more candles, at least one of which is a local minimum or maximum. For example, it can be five candles, among which the third in a row (average) will be the highest.
The Fractals indicator by Bill Williams detects such patterns automatically and displays them on the chart.
But why determine these local minima and maxima at all?
The fact is that each such top or bottom is for traders something like a landmark mark, a landmark to which the trend will strive in the future, but which will not be so easy to overcome. In this regard, fractals are similar to key levels (which are often built on the basis of local lows and highs).
When concluding a deal, the trader will analyze the behavior of the price in relation to the fractal. For example, if the price goes up and rises above the last local peak, this indicates that the trend is strong enough to go a certain distance, so it is advisable to open a buy position.
Installing and configuring the indicator
The Fractals indicator is installed on the chart according to the standard scheme, like other technical instruments of the MetaTrader 4 platform . The easiest way to do this is through the “Indicators” button in the top menu of the terminal.
the tool settings are minimal: you can only choose the color and size of the fractal icon, as well as the timeframes on which it will not be displayed.
After the indicator is installed on the chart and set up, you can start trading on CFDs .
The simplest trading strategy is to enter the market on the breakout of a fractal. Trade is conducted as follows:
- When the price rises above the last rising fractal, a buy trade is opened.
- When the price drops below the last down fractal, a sell trade is opened.
In each transaction, a stop loss must be set (for example, on the opposite shadow of the signal candle). Take profit can be set at a ratio of 3:1 to the stop, or exit on the opposite signal.
However, unfortunately, trading on fractals alone is unlikely to bring stable profits. This indicator gives a lot of false signals even in a trend, and in a flat, trading on it comes down to a constant stop loss exit . In order to make trading efficient and profitable, it is necessary to supplement the system with other tools that will act as a filter and reduce the number of false entries.
Fractals + Alligator strategy
In order to improve the trading strategy, let’s add one more indicator of Bill Williams, Alligator, to it. Thus, we get a simplified version of Williams’ strategy, which he describes in his books in the “Trading Chaos” series.
The Alligator indicator is three moving averages of different periods plotted on the chart with some forward shift. During the flat period, the moving averages intertwine with each other, warning the trader against false entries into the market. With a trend, the Alligator lines diverge, giving a signal of a favorable situation for opening a deal.
You can enter a buy strategy using the following conditions:
- The Alligator lines gradually diverge after the flat.
- The price is above the red line of the indicator.
- An ascending fractal breakout occurs.
Sell trades are opened if:
- The Alligator lines gradually diverge after the flat.
- The price is below the red line of the indicator.
- A downward fractal breakout occurs.
You can exit a trade either by fixed stop loss and take profit, or by using a trailing stop. In the original strategy of Bill Williams, it is proposed to independently tighten the stop loss along the red line of the indicator, however, as you can see in the screenshot above, exiting along the red line may turn out to be premature, and deprive the trader of the opportunity to take profit from a strong trend completely.
Bill Williams Profitunity Strategy
In conclusion, let’s look at a professional strategy using fractals – Profitunity by Bill Williams. It is worth noting that there are several versions of this strategy: in addition to the indicators that the trader developed on his own, earlier versions used candlestick analysis and even classic oscillators. We will analyze one of the latest versions, which includes the two indicators already discussed above, as well as two oscillators – Awesome Oscillator and Accelerator Oscillator.
According to Bill Williams himself, one of these indicators displays the speed of the market (trend), and the second – its acceleration. The use of tools will help to get additional profit from the same transaction.
Trades to buy according to the Profitunity strategy are opened subject to the following conditions:
- The price is above the red line of the Alligator.
- There was a breakdown of the fractal up.
- The last two columns of the Awesome Oscillator are green.
- The last three columns of the Accelerator Oscillator are green.
Sell trades are opened in mirror conditions.
To increase profits, the system provides for the opening of additional transactions when other fractals are broken in the direction of the transaction. Repurchase can be carried out both with the same lot, and reduced with a certain coefficient. Thus, during one trend, up to 10 additional purchases can be made, which allows you to increase profit up to 5 times in case of a correct forecast.
The exit from the transaction in this case is carried out on the red line of the Alligator. Setting a hard stop loss and take profit makes it impossible to increase profits, which is contrary to the purpose of this system.
A fractal is an example of an indicator that should only be used in conjunction with other technical instruments. Alone, it is practically useless, and even harmful to a trading account, but in a professional trading system it can bring big profits, as evidenced by the success of Profitunity and the considerable fortune of its author, Bill Williams.
Trading in financial markets involves a high level of capital risk. In order to reduce risks, it is recommended to strictly follow the rules of money management and always set Stop Loss. All decisions that a trader makes while working on Forex are his personal responsibility.