Fractal is one of the five indicators in Bill Williams’s trading system. It represents a turning point on a chart segment. The Fractal indicator does not have anything to do with mathematical fractals. In traderspeak, it refers to repeating patterns on charts.
A fractal is a series of at least five successive bars. A fractal has high and low values and is indicated by the up and down arrows. The rules for identifying a fractal are as follows:
- A bearish (up) fractal occurs when there is a pattern with the highest high in the middle and two lower highs on each side.
- A bullish (down) fractal occurs when there is a pattern with the lowest low in the middle and two higher lows on each side.
In other words, an up fractal exists at the period N if all the following conditions are satisfied:
- High (N – 2) < High (N)
- High (N – 1) < High (N)
- High (N + 1) < High (N)
- High (N + 2) < High (N)
A down fractal exists at the period N if all the following conditions are satisfied:
- Low (N – 2) > Low (N)
- Low (N – 1) > Low (N)
- Low (N + 1) > Low (N)
- Low (N + 2) > Low (N)
Fractal can be used as a stand-alone indicator or in combination with the other indicators.
Usage with Alligator Indicator
The most common Fractal indicator is used by traders with the Alligator indicator. In his book, Chaos Theory, Bill Williams says that fractals generate the following signals:
- If a buy fractal is above the Alligator's teeth (the red line), we would place a Buy Stop one tick above the high of the up fractal.
- If a sell fractal is below the Alligator's teeth, we would place a Sell Stop one tick below the low of the fractal sell signal.
- We would not take a buy if a fractal is formed below the Alligator's teeth.
- We would not take a sell if a fractal is formed above the Alligator's teeth.
Support and Resistance Levels
Fractals point out strong levels. You can draw a line to connect multiple fractals to form either a resistance or a support level. These levels work exactly the same as a trend. But if you use the Fractal indicator with the Alligator indicator, it is more obvious when the price breaks a resistance or support level.
Note that Bill Williams’s fractals appear a little late on a chart, because they need the fifth bar to close and determine the highest high or the lowest low. Also, note that, like most technical indicators, Fractal should not be used alone, because it produces many false signals.
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