While it can easily be argued that prices are random, they do tend without doubt to follow certain trends. A trader can determine trends based on the use of fractals.
Understanding Fractals
While fractals tend to be a mathematical concept, traders use fractals to determine recurring patterns that can often predict trend reversals or breakouts.
Trend Reversals
Fractals are usually comprised of at least five bars. A bearish fractal can be identified when a high bar or candlestick has two lower highs on each side. A bullish fractal would be just the opposite. A low bar with two higher lows on each side. The problem with fractals is they are what are called, lagging indicators. What this means is, because you need at least a total of five bars in order to determine the pattern, the reversal will already have started before the pattern is discovered.
Fractal Breakouts
Because fractals have a high or low bar forming a triangle of five or more bars, a trader can use fractals to determine breakouts. When a currency’s price moves above the highest bar in what would be a bearish pattern if the trend reversed, a bullish breakout is likely. The reverse holds true with the lowest bar in a bullish pattern. If the price moves lower, a bearish breakout is suggested.
Fractals in Forex
Like all trading tools, fractals are best used in concert with other tools, and indicators such as understanding candlestick patterns, and the use of Fibonacci Retracement.
Alligator Indicator
The most common tool forex traders use with fractals is, however, the Alligator Indicator. By applying three moving averages, you sell when the highest point in the bearish fractal is above the center average and buy when the lowest point in a bullish fractal is below the center line.
Fibonacci Moving Averages
Forex traders also rely a great deal on Fibonacci moving averages to help confirm a fractal pattern. A trader does this by initiating a position when the daily fractal has reached the farthest Fibonacci band. He or she will exit the trade when a daily fractal reversal occurs. This strategy helps make both fractals and Fibonacci more accurate and reliable.
Conclusion
Because fractals are lagging indicators, they are best used as confirmation indicators of trend reversals or breakouts. The longer time chart the trader uses will produce the most accurate results. Like other trading strategies, short term fractals should be traded only in the direction of the longer term trend. Fractals offer forex traders a powerful support tool which, when used in conjunction with other indicators, could prove to be a reliable method for trading currencies in the forex market. Bcapital is a leading forex brokerage firm. For more information on how to use fractals, or other forex trading advice, visit www.bcapital.com.
