It is no secret that fractals are among the most fascinating phenomena in science and mathematics. In the world of Forex trading, they can assist traders in identifying key support and resistance levels, along with potential trend reversals.
Introduction to Fractals:
A fractal is a pattern that repeats itself at different scales. That means a small part of the pattern looks the same as the whole pattern, and the same is true for larger and larger portions. In the 1970s, mathematician Benoit Mandelbrot coined “fractal,” which refers to an infinitely complex self-similar object.
Fractals and Forex Trading:
Forex traders use fractals to identify support and resistance levels. A fractal occurs when five consecutive bars (or candlesticks) have the highest high in the middle, followed by two lower highs on either side. A “buy fractal” is formed when the lowest low is in the middle of five consecutive bars with two higher lows on either side. Conversely, a “sell fractal” forms when the lowest low is in the middle, and two higher lows are on either side.
Using Fractals for Support and Resistance:
Identifying key support and resistance levels using fractals is possible once they have been identified. If a buy fractal occurs above the current price, the market will continue to rise, and the fractal level will likely act as a potential support. Conversely, if a sell fractal is formed below the current price, it is a sign that the market is likely to continue falling, and that level becomes a potential resistance level.
Identifying Trend Reversals with Fractals:
A series of fractals formed in one direction signify a trend reversing. If they then form fractals in the opposite direction, that can indicate the trend is reversing. It can be a sign that the market is about to fall if a series of buy fractals appear, followed by a series of sell fractals.
Combining Fractals with Other Tools:
Forex traders must remember that fractals aren’t the only way to use them. Traders can use fractals as one of many tools to identify key levels of support and resistance, and they should always be paired with other technical analysis tools, like moving averages, trend lines, and Fibonacci retracements, to determine critical levels of support and resistance.
The Subjectivity of Fractals:
While the basic definition of a fractal is straightforward, there is still room for interpretation when identifying fractals on a chart. Another important consideration when using fractals in forex trading is that they are subjective. Traders can identify fractals differently, and therefore, their use can differ.
Forex traders can use fractals to identify key support and resistance levels and potential trend reversals. Traders can make more informed trading decisions by understanding how fractals work and how they can be used in conjunction with other technical analysis tools.
Further Considerations on Using Fractals
The following are a few things to keep in mind when using fractals.
- These indicators are lagging indicators.
- A fractal is usually a very common indicator so you can combine it with other indicators or strategies. Fractals should not be relied upon on their own.
- Reversals are more reliable if the chart period extends. Longer chart periods also generate fewer signals, so the longer the chart period, the better.
- If you are looking for fractals with multiple time frames, you should use multiple time frames. For example, trade short-term fractals in the direction of long-term fractals. Focus your trading on long trade signals during larger uptrends and short trade signals during larger downtrends.
- Almost all charting platforms now offer fractals as indicators.
Bottom Line
It is useful to use fractals along with other indicators and techniques. A trader can use fractals in many ways, and each will find their method. An Alligator indicator and Fibonacci retracement levels may work well together. Many traders don’t like fractals. They aren’t necessary or even useful for successful trading.
