Fractals are a helpful traders’ tool that makes it possible to enhance not only a trading strategy but also the use of technical analysis when utilized with other technical indicators. Besides, they come as a handy technique whenever you need to apply a safe market entry method or identify a spot to place stop-loss orders.
As a rule, fractals refer to natural support and resistance levels. At the same time, they can be spotted at significantly higher levels, which makes them a perfect instrument to determine the trend. In this article, we will define fractals, their use, and simple ways to apply them in Forex trading.
What Are Fractals?
What is fractal? When traders come across the term, complex math is the first thing that comes to their minds. However, fractals in trading are different from what we know from mathematics. Here, we are discussing recurring patterns that appear when the rice makes bigger chaotic moves. As a rule, the pattern is plotted with five or more bars. Here are some simple tips that will let you identify fractals on a chart:
- A pattern with lower highs on each of its sides along with the highest high in the middle is considered a BEARISH turning point.
- A pattern with the lowest low in the middle and higher lows on each side is considered a BULLISH turning point.
The image below shows the basic variation of the two fractal types. They may look a bit different but still depict a valid fractal pattern.
The key challenge here is that fractals refer to lagging indicators. It means that available bars are not enough to highlight a continuing reversal.
Major Factors to Consider when Using Fractals
Traders should take into account several crucial things before using fractals. They are as follows:
- Fractals refer to lagging indicators.
- To make the most of them, fractals should be used in combination with other trading strategies or Forex indicators. Traders should not rely only on this particular indicator.
- The most reliable reversal comes with a long-running chart.
- The longer the time frame, the fewer signals will be generated.
- Multiple timeframes are better to plot fractals.
The good news for beginners is that indicator comes as a built-in solution in the majority of charting software. It means that you do not have to download or configure it manually.