Successful traders can easily predict the direction in which the price will develop. From a newbie’s perspective, price fluctuations can’t be forecasted.
In order to spot significant patterns in price movements, the aforementioned successful traders and large market players use multiple indicators (this is what novices don’t know about), one of which is – a fractal.
No, we’re not talking about complex mathematics here but recurring patterns that can indicate trend reversal (both price increases and downfalls) even during the most chaotic times on the market. Down below, we’ll be elaborating on what are fractals in Forex, two main fractal patterns, and how to use fractals in your Forex positions.
What Are Fractals in Forex?
So, as already stated, fractals are on the list of the most useful tools or patterns that help Forex traders predict price movements and get the idea of when it is the best time to sell or buy in order to generate greater profits. These repeating patterns can be easily spotted on the charts and are actually among the simplest indicators to comprehend.
Fractals consist of 5 (or more) bars or candles that indicate bearish or bullish trend reversals and, most often, occur when the market conditions are quite hectic (which is why they shouldn’t be the only indicators traders rely upon but coupled with more indicators).
Two Main Types of Fractals in Forex
Depending on the positions of the 5 candles that create fractals, two types of fractals can be identified – bearish and bullish.
Talking about the bearish fractal, it looks something like this: the middle candle is touching its highest high while candles on the left and right are at their lower highs. In other words, after a continuous uptrend, the price reaches a peak, faces strong resistance, and then turns downwards.
The bullish fractal looks completely the opposite: the middle candle is at its lowest low and the other candles are at their higher lows. When the price touches the lowest point after a long period of decline, a reversal occurs, and an uptrend is set about.
Yet, there is another categorization of fractals to perfect and imperfect, depending on the position of the outer candles. Symmetrical outer hands (that align against each other) indicate a perfect fractal, while symmetrical outer hands are typical for imperfect fractals.
What Are Broken Fractals?
Traders don’t make buying or selling decisions all until a fractal is fully closed. However, sometimes, although a fractal is seemingly formed, another pattern – a broken fractal is created shortly after, upon the opening of the sixth candle. When the sixth candle goes lower or higher compared to the lowest and highest points of the fractal, a broken fractal can be spotted.
As an example, if the sixth candle goes higher than the highest point of the fractal, it actually announces a bullish movement in the market, and this is the time when traders are accumulating more assets.
Contrariwise, if the sixth candle goes lower than the lowest point of the fractal, it is announcing a bearish movement and a downtrend, and this is the moment when traders start entering short positions.
How to Use Fractals?
Since fractals are commonly used among traders, you’ll be able to find this trading indicator no matter which charting platform you are using. The software should highlight the pattern as soon as it is chosen from the indicators list.
One thing you are going to notice is that fractals occur pretty often. Still, you should pay attention to complete patterns only. A fractal is complete only when all of the candles are fully closed (that’s why this pattern is also known as a five-candle pattern).
Making trading decisions while the fifth candle is still forming is not a wise decision. Depending on the price movement – if it is going below the lower low or higher than the higher high, the fractal will or won’t appear. So, once again, to enter a new trade, double-check if the fractal is confirmed.
That is also why you should keep an eye on other indicators at the same time, such as the Alligator. The Alligator indicator consists of 3 moving averages, also known as balance lines (alligator’s jaw, lips, and teeth), that can be used for identifying the upcoming trend (or an absence of a trend).
You might want to switch to a longer timeframe to reduce the number of fractals and to be able to catch sight of trading opportunities. With Forex and other markets, it is all about how you read the patterns and interpret the data.
You can use fractals to determine where to set your stop-loss. In this case, they either stay in the long position for as long as the price is higher than the stop loss point (during uptrends) or they stick to the short position all until the price is lower than the stop loss price.
Fractals can be used for determining levels of taking profits, too. For instance, if you’ve spotted a bullish fractal and opened a long position, you should keep your eye on the chart to recognize the moment when a bearish fractal is about to form. At the same time, this is the moment when you should take profits.
Well, know you know what are fractals in Forex. Does that mean you should rely solely on this indicator before entering trades? Absolutely not! You should keep your eye on multiple indicators and apply multiple trading techniques to successfully determine trend reversal and the best moment to enter long or short positions.