TRADING RUSH
Fractal is a popular indicator among new traders that shows important price levels on a trading chart. The indicator was created by Bill Williams, who also created the alligator indicator. The video discusses a basic fractal trading strategy and how it creates false signals. To filter out these false signals, traders can use the alligator indicator to find the direction of the long-term trend. The video also mentions important things to note about the fractal indicator, such as its lagging nature and how to set stop-loss and profit targets. The presenter will test this fractal indicator 100 times in the next video to determine its real win rate.
Fractal Indicator: An Introduction
Fractal indicator is one of the most popular indicators used by traders to identify important price levels on a trading chart. Created by Bill Williams, the same person who created the famous alligator indicator, the fractal indicator uses arrows to highlight potential support and resistance levels based on a specific price pattern. In this article, we’ll take a closer look at the fractal indicator and its application in trading.
Understanding the Fractal Indicator
The fractal indicator uses arrows to signal important price levels on a trading chart. When a red arrow appears below a candle, it indicates that the candle’s low point could be a potential support level. Similarly, when a green arrow appears above a candle, it indicates that the candle’s high point could be a potential resistance level.
However, the fractal indicator only considers certain candles to be important. The green fractal arrow appears when there are two candles with a lower high on each side of it, while the red fractal arrow appears when there are two candles with a higher low on each side of it.
Basic Fractal Trading Strategy
Many traders use the fractal indicator as a basis for their trading strategy. They consider a downward-pointing red arrow as a buy signal, and set the stop-loss below the candle that is showing the arrow. Conversely, an upward-pointing green arrow is considered a sell signal, and the stop-loss is placed above the candle that is showing the arrow.
However, this basic setup creates a problem – the fractal indicator works on a common price pattern and can generate many false signals. As a result, if one were to trade all the signals provided by the fractal indicator, they would likely lose money.
Alligator Indicator as a Filtering Tool
To filter out false signals generated by the fractal indicator, traders can use another indicator created by Bill Williams – the alligator indicator. If the price is below the alligator lines, the price is considered to be in a downtrend, and if the price is above the alligator lines, the price is considered to be in an uptrend.
Using this knowledge, traders modify the basic fractal trading strategy and only buy when the red arrow pointing downwards appears below a candle and the price is above the alligator lines. Similarly, they only sell when the green arrow pointing upwards appears above a candle and the price is below the alligator lines.
Examples of Fractal Trading Strategy
To further clarify how the fractal indicator and alligator indicator can be used together in a trading strategy, let’s take a look at some examples. In a situation where prices are above all the alligator lines, traders may enter a long trade when the fractal indicator gives a long entry signal. The stop-loss would be placed below the swing low.
Similarly, in a situation where prices are below all the three alligator lines, traders may enter a short position when the fractal indicator gives a sell signal. The stop-loss in this case would be placed above the swing high.
Important Things to Note about the Fractal Indicator
There are several important things to note about the fractal indicator. First, a bullish fractal occurs when there is a low point with two higher low candles on each side of it, while a bearish fractal occurs when there is a high point with two low or high candles on each side of it.
Second, if an up arrow appears above a candle, it is a sign that the market can go down. If a downward-pointing arrow appears below a candle, it is a sign that the market can go up.
Third, the fractal indicator takes five candles into consideration. A green arrow will only appear above the middle candle, while a red arrow will only appear below the middle candle.
Fourth, the fractal indicator is a lagging indicator, and entry signals should only be taken after the completion of a candle.
Fifth, to take price volatility into consideration, traders can use the ATR stop-loss, which considers the average true range of price movement.
Conclusion
In conclusion, the fractal indicator is an interesting tool that can help traders identify potential support and resistance levels. However, it can generate a lot of false signals, which can be filtered out using the alligator indicator. To get consistent results, traders need a fixed profit target trading strategy. If they prefer to trail the stop-loss, they can use the ATR trailing stop loss with the fractal indicator.
