Introduction to the Fractal indicator
Fractal trading refers to trading based on defined price extremes. The peaks and troughs on a chart form a sequence and trading decisions are made based on these. The indicator I will be writing about today is called the Fractal. What does ‘fractal' mean? It is a geometrical figure where similar patterns repeat themselves over and over again. And in trading, the Fractal indicator is based on the patterns that are noticed repeatedly on the price chart.
The fractal indicator captures possible turning points on the chart and draws the arrows. They show pattern formation. The fractal pattern can be a bullish or a bearish one.
Setting up the chart for fractal trading
Go to your IQ Option account and open a chart for the asset of your choice. Find the chart analysis icon on the left side of the platform and click on it. Then, choose ‘Popular' under the indicators' tab. The last step is to find our indicator and press the button ‘Fractal'. This procedure will attach the indicator to the chart.
What are the best Fractal indicator settings?
The IQ Option can be set to any indicator period between 3 and 50. The default value is 5. This is the value Williams used when constructing this indicator, so it is the most common setting. Choosing higher values will result in more significant peaks and bottoms being marked on the chart, as the extremes will be selected from a larger number of candles, which is defined by the indicator period. I certainly would not recommend going below 5, but experimenting with higher period values is highly recommended.
How to identify the Fractal pattern on IQ Option
The fractal pattern consists of 5 candlesticks. The arrow is drawn below or above the middle candle which is the low or high point of the pattern.
The bearish fractal pattern emerges when there are two lower highs with one higher high between. It is marked by an up arrow and signals potential fall in the price.
The bullish fractal pattern appears when there are two higher lows with one lower low between them. It is marked by a down arrow and gives a signal the price could go upward.
Calculating the pattern is more an observation than math. You just need to search for low and high points on the price chart. When you isolate such, you have to check what candles are developed on the left side of your low/high. Then, you will only have to wait for the next two candles to confirm the pattern.
So if you find a high point and there are two lower highs on the left side, it is very possible this is our pattern. Wait, however, until two more candles appear. If they are also lower highs, the fractal is fully developed.
When you isolate a low point and there are two higher lows on the left from your point, and then two higher lows occur afterwards, the bullish fractal is complete.
How do you trade fractals on IQ Option?
The Fractal is a very common pattern. You will probably see many arrows on your chart. The arrows appear on low/high points. However, they do not signal the entry point as the Fractal will only occur when the next two bars confirm the pattern. Thus, the entry point should be after the third candle after the arrow.
The Fractal pattern gives information about the possible change in the trend direction. The pattern itself creates ‘U-shape' in the price bars. When the price is falling to a low point of the pattern and then rise, we have ‘U-shape' for a bullish Fractal. It is assumed, that the price will go up. When the price was moving up until a high point, generating an upside ‘U' and confirming the Fractal pattern, the price will most probably move down.
As I said, the signals from the Fractal pattern will appear frequently. Therefore, you should not rely just on them. You can use additional forms of technical analysis like trend analysis or pivot points.
Another way of fractal trading is to enter the trade when the price closes above or below the fractal high/low. Let's look at the exemplary charts.
There are several arrows visible on the price chart. Search for a moment where the candle closes above or below the fractal high/low points. In this case, the fourth candle after the upper arrow met this condition. Now is a good time to enter a 3-minute position for the price increase.
The next chart shows two examples of opening 3-minute trades for the price decrease. In these cases, the price closes below the fractal lows. Thus, the downward is predicted.
How do you read fractals?
Fractal trading is not only about trading based on the breakout of local peaks or bottoms. Fractals can be used to read charts. With their help you can more easily determine horizontal support and resistance levels and draw trend lines. It is also much easier to identify popular technical analysis formations such as head-and-shoulders, double tops and triangles. In principle, everything that contains price action can be read with the help of fractals. They are also helpful in detecting divergences.
Final thoughts about fractal trading
The Fractal indicator is based on the patterns that repeat themselves often. It helps to predict a change in the direction of the price.
You may be overwhelmed by the frequency the arrows appear. It is important that you remember not all of them are trading signals. You should not use them all but, instead, you should patiently wait for a few next candles to develop or use extra indicators and other forms of analysis.
The arrows typically appear in the middle of the pattern. They may give a false impression of good entry points. Bear in mind, there are two more candles that have to be developed until the pattern could be confirmed. Thus, you should not open a trade earlier than on the third candle after the arrow develops.
It is recommended that you check how the fractal trading works on a demo account. Like this, you will have the possibility to know it better and to learn how to use it in order to get the best entry points. Once you get confidence in using the Fractal, trade with it on a real account.
Wish you a pleasant experience!
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