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Fractal Indicator is a trading indicator used in technical analysis that is used to identify potential trend reversal points in the market. For more details, you can read the following learning article. Don't forget to follow GIC Instagram for other trading information!
What is the Fractal Indicator?
The Fractal indicator is a trading indicator used in technical analysis that is used to identify potential trend reversal points in the market. It was developed by a well-known trader, Bill Williams, and is therefore also referred to as the Williams Fractal Indicator. Williams presented the Fractal indicator in his book, “Trading Chaos,” noting that his idea for the indicator traces its origins to the mathematical theory of chaos. In mathematics, a Fractal is essentially any type of repeating pattern. The premise of the Fractal indicator is that you can detect, and potentially profit from, repeating patterns in price movement that occur across various trading time frames (hourly, 4-hour, daily, weekly, etc.). Using the Fractal indicator is essentially pattern recognition in the price action of a traded security. Once a pattern is recognized, the trader can then buy or sell, depending on whether the Fractal indicator is bullish or bearish, looking to profit from a market reversal.When Does the Fractal Indicator Appear?
The Fractal indicator is provided by TradingView and other advanced trading platforms. It is not provided by default on the MT4 and MT5 platforms. Therefore, to use it there, you need to download it manually and add it to the trading platform. Day Traders use the Fractal indicator in several ways. Some use it to complement other indicators such as moving averages, the Relative Strength Index (RSI), and the market facilitation index, among others. Other traders use it to confirm bullish or bearish trades. Furthermore, some traders use the Fractal indicator to determine the highs and lows of an asset while others use it to identify entry and exit points. Others use the indicator to find stop-loss levels. In the chart below, if you were long the EUR/USD pair, you would place your stop-loss at the bottom of the lower Fractal and your take-profit level above the two rising Fractals.
As mentioned, you can use Fractals to find potential breakout areas. You do this by looking at the current Fractal level and comparing it to the previous one. In this case, a buy breakout usually occurs when the asset price moves above the last upward Fractal. Similarly, a short breakout occurs when the price falls below the downward Fractal.
Fractal Indicator Function
The Fractal indicator offers the advantage of providing traders with an easily identifiable market entry point (at the close of the fifth candle in the pattern) and an equally easy price point for a stop-loss order. With a bearish Fractal pattern, a trader sells short and can then place a stop-loss order just above the highest price reached in the Fractal pattern. With a bullish Fractal pattern, a trader buys at the close of the fifth candle and can then place their stop-loss order just below the lowest low of the five-candle Fractal pattern. Here are some of its functions:Detecting Bullish Turning Points
Now let’s show you what the Fractal alligator system looks like on a price chart. We’ll start with a bullish example. If you refer to the price chart below, you’ll find the price action for the New Zealand Dollar to Canadian Dollar forex pair on a daily timeframe.
Notice on the chart above you will find the alligator indicator overlaid on price. The fastest line, referred to as the lips of the alligator (Fractal Alligator) is shown in green. The slowest line, referred to as the jaws of the alligator (Fractal Alligator) is shown in blue. And the teeth of the alligator (Fractal Alligator) are represented by the red line. Starting from the far left of the price chart, you will notice that the lines begin to converge and overlap, creating a tight, dense appearance. This tells us that the market is in a sleep mode, which could result in an expansion of volatility at some point. We have noted where the reverse crossover occurred, and can see that the lines begin to diverge from that point onwards. Now, the actual entry signal will occur on a breakout and close above the relevant upward Fractal formation. The specific upward Fractal that we want to use as our breakout signal is noted with the maroon dotted line. A close above this level will provide confirmation for a buy signal based on this trading strategy.
Shortly after the formation of the Up Fractal, price began to rise and eventually broke above and closed above the high of the Up Fractal. A market order to buy would have been initiated at the start of the following candle, which is noted on the chart as the entry point. Based on the rules of this Fractal forex trading strategy, a stop loss would have been placed below the nearest Down Fractal before the entry signal. You can see that the stop loss was noted, and placed accordingly, below the candle that looked like a doji candlestick formation. Now that we have protected the position with a stop loss, we need to monitor price action closely to execute an exit as price moves in our favor in the bullish direction. The exit signal here is the crossing of the green line, the Alligator's lip, below either of the other two lines.
Detecting Bearish Turning Points
Now let’s look at a bearish example of this Fractal Alligator trading strategy. The chart below is for Bitcoin on a daily timeframe.
Starting from the far left of the screen, we can see that the three lines that make up the Fractal Alligator indicator are starting to converge and narrow. At the same time, the price action is becoming compressed, building up energy for the next price move. The Fractal Alligator indicator is quite useful in spotting market conditions that indicate congestive price behavior like this. We know that markets are cyclical, and periods of low volatility are followed by high volatility, and vice versa. Thus, we should expect price to start a new trending move after a tight consolidation phase. The next step is to wait for the green line, the lips, to cross below the red and blue lines, which represent the teeth and jaws of the Fractal Alligator, respectively. The crossover event is recorded on the price chart. From here, we want to mark the support level that coincides with the low of the most relevant descending Fractal. The low of that specific Fractal has been marked with the dashed maroon line. This will serve as the short entry trigger for this trade setup. Shortly after the crossover to the downside, we can see that the bearish candle broke below the low of the descending Fractal and managed to close below it as well. The market order to sell will be initiated at the beginning of the following bar. You can see where the sell order will occur by referring to the blue arrow labeled Entry. The stoploss placement is also determined by the nearest Fractal. In this particular case, we will refer to the nearest Fractal that formed before the entry signal. If you scroll to the left side of the chart from the entry point, you can find the Shooting Star candlestick which serves as the relevant Fractal that we need to use for our stop placement.
Forex Indicators: Definition, Functions and Types of Indicators
How to Use Fractal Indicator
The Fractal indicator can be used in trading in many ways.- It shows where to place stop loss and take profit orders.
- This identifies potential breakouts.
- It works best when paired with the Williams Alligator. There are specific conditions specified by Williams where both indicators work together to the trader’s advantage.
- It can also be useful in combination with Fibonacci levels or Pivot points indicators.
- Since the Fractal Indicator is a trend indicator, it is used to determine the trend direction.
- The buy fractal acts as a resistance level, and when the price breaks above it, a buy signal appears.
- The sell fractal acts as a support level, and when the price moves below it, a sell signal occurs.
How to Use Fractal Indicator Accurately?
The use of graphic patterns always includes the interpretation of the chart, so it can be said that the patterns are searched for and drawn intuitively. To simplify the process, many experienced traders use Fractals that help to evaluate the situation more objectively. For example, if we use Wolfe Waves, it is not always possible to determine all the points necessary to draw a pattern. And if a trader adds fractals to the indicator, important levels and support points will become more visible on the chart, which will make trading and decision-making simpler.
In addition to making it easier to find important levels, we can place pending orders above or below the fractal depending on where the chart pattern points: this frees us from the screen all the time. For example, there is currently a Head and Shoulders reversal pattern forming on H4 AUD/USD. When we add the indicator, we can see an important resistance level at once around 0.6960. At the moment the left shoulder formed, the price projected the level and pushed down. As we see, a fractal formed later which marked this level as important. Then, at the formation of the right shoulder, we can also see an upward fractal appearing after testing 0.6960, which means a strong resistance level.
So, if we open a trade at the current market price, we should place a protective Stop Loss above this area. We can add a new sell trade after the breakout of 0.6830. As we can see, here too, at the time of testing this area, several descending fractals were formed, which confirms the importance of this level as a support area. Here, the neckline of the Head and Shoulders reversal is also located; a breakout of this area will mean that the formation of the pattern is complete and its implementation is in full scale.
After learning about the Fractal Indicator along with its functions, how to use it, and when this indicator appears, you can start using this indicator in the trading you are doing. To be able to trade with a trusted trading platform, you can register at GIC with a minimum capital of 150,000 Rupiah! 
