Contents
Today, I am going to present Dreiss's tool known as the Fractal Chaos Bands. The prices of the financial instruments in the market are in constant motion. They seem to be very chaotic. And while sometimes they are chaotic indeed, occasionally, you can discover they form repeatable patterns. Traders were trying to catch these patterns over the years and they invented many indicators that are of great help in this task.
Key Takeaways🔑
| →The Fractal Chaos Bands indicator helps traders identify trending markets and filter out insignificant price movements. |
| →Edward William Dreiss developed the indicator using fractal geometry to measure price fluctuations. |
| →Using the Fractal Chaos Bands indicator with additional filters, like the Simple Moving Average, can help reduce false signals and improve trading accuracy. |
Introduction to the Fractal Chaos Bands
Edward William Dreiss was an Australian advisor and commodity trader. He invented the way of measuring fluctuations of prices by using fractal geometry. His indicator filters out insignificant movements or whipsaws and presents a general situation of the price action.
Adding the Fractal Chaos Bands to the IQ Option chart
Log in to your IQ Option account first and choose the type of asset you are going to trade. Then click on the indicators icon and find the Fractal Chaos Bands indicator. It will be displayed over the price bars with lower and upper bands.
All indicators come with default settings. You can, however, modify them if it makes readings easier for you. Here, you may choose to adjust the thickness and colours of each line and fill the channel with some colour.
Trading with the Fractal Chaos Bands indicator
The Fractal Chaos Bands indicator provides information on whether the market is trending or ranging. The bands have a certain slope in trend direction. They remain flat when there is no trend in the market.
When the slope grows it means the trend is forming or it becomes stable. When the slope diminishes we can assume the market becomes insecure and variable.
The lower band of the indicator is formed based on the price lows and the upper on the price highs.
The Fractal Chaos Bands is formed by 5 consecutive candles with the lowest low or the highest high in the middle. These low and high values are shown by the lower and upper bands. Fractal can appear with just one bar to its right side but then it is unconfirmed and it will disappear when the price goes beyond this level. Wait for the second candle and the fractal will appear for sure.
Pros and Cons📈📉
Pros
- Identifies trending markets and filters out insignificant price movements.
- Can be combined with other indicators for improved accuracy.
- Helps traders make informed decisions based on price action.
Cons
- May produce false signals in certain market conditions.
- Requires supplementary filters to reduce whipsaws.
- Not suitable for all trading strategies and asset types.
| Fractal Chaos Bands | Simple Moving Average (SMA100) |
|---|---|
| Identifies trending markets and filters out insignificant price movements. | Helps to smooth out price data by creating a constantly updated average price. |
| Requires supplementary filters to reduce whipsaws and false signals. | Can be used as a supplementary filter to improve trading accuracy. |
| Based on fractal geometry to measure price fluctuations. | Based on a simple arithmetic moving average calculation. |
Signals to open a trading position with fractal bands
A signal to go short is received when the price closes below the lower band of the indicator. When the candle closes above the upper fractal line, you can open a long position.
To secure your trade you can trace the stop loss with the declining line (when selling) or the rising line (when buying).
Avoiding whipsaws
Indicators sometimes produce false signals. Naturally, you want to avoid misleading signals and whipsaws. To do that, add a supplementary filter to the chart. It can be a Simple Moving Average with a period of 100.
With the SMA100 attached, a signal to enter a sell trade will be confirmed when the price breaks the lower band of the Fractal Chaos Bands below the moving average. Do not open a position when the asset's price crosses the band above the SMA100.
A buy trade can be opened when the candle breaks the upper fractal line above the SMA100. Avoid going long when the price is below the moving average. As you can see, the aforementioned signals together with the SMA100 average filter can form a solid basis for a fractal chaos bands strategy.
Summary
The indicator invented by Edward William Dreiss helps to identify trending markets. It is based on fractal geometry.
The Fractal Chaos Bands draws a channel over the price chart. If you look at the slope of the bands, you will be able to tell whether the market is trending or not. In order to obtain trading signals, wait for the candles to break the lower or upper band of the indicator.
You can use the Fractal Chaos Bands with another tool as for example Simple Moving Average. It will additionally filter the false signals out.
Practice using the Fractal Chaos Bands indicator in the IQ Option demo account. You will not risk losing your money there as it is supplied with virtual cash. Move to the live account after some time so you get chances to earn real profits.
Good luck!
Short Q&A💡
- Q: How can the Fractal Chaos Bands indicator help traders?
A: The Fractal Chaos Bands indicator can help traders identify trending markets, filter out insignificant price movements, and make informed decisions based on price action. - Q: How does the Fractal Chaos Bands indicator work?
A: The indicator is based on fractal geometry and measures price fluctuations by analyzing consecutive candles with the lowest lows or highest highs in the middle. - Q: Can the Fractal Chaos Bands indicator be used with other indicators?
A: Yes, it can be combined with other indicators like the Simple Moving Average (SMA100) to improve trading accuracy and reduce false signals. - Q: What are the limitations of the Fractal Chaos Bands indicator?
A: The Fractal Chaos Bands indicator may produce false signals in certain market conditions and requires supplementary filters to reduce whipsaws. It may not be suitable for all trading strategies and asset types. - Q: How can traders reduce whipsaws when using the Fractal Chaos Bands indicator?
A: To reduce whipsaws, traders can add supplementary filters like the Simple Moving Average (SMA100) to their chart. This can help confirm trading signals and improve accuracy.