The fractals indicator (known in English as fractals) is a technical indicator developed by Bill Williams that allows identifying the local highs and / or lows of the price of a financial asset.
The idea of the fractal indicator is to identify the benchmark highs and / or lows to determine the stock trend. Thanks to these points, an attempt is made to establish possible trend changes. That is, they are used as support and resistance.
The fractals, which are the arrows that appear above and below some Japanese candles, mark these reference points.
How is the fractal indicator calculated?
It is important to know that the fractal indicator is based on a geometric pattern. Now, what geometric pattern is it based on? Well, it is based on a very simple pattern based on five candles. In such a way that:
The bullish fractal is the one that places the arrow above the candle. To form a bullish fractal, the candle must have a maximum higher than that of the two previous candles and that of the two subsequent candles. For instance:
The bearish fractal is the one that places the arrow below the candle. To form a bearish fractal, the candle needs to have a lower minimum than that of the two previous candles and that of the two subsequent candles. For instance:
Therefore, it is very important to always look at the two previous candles and the two after them to know if the rule to mark a fractal is fulfilled. As long as the rules are followed, we can find a bullish fractal and the next candle a bearish fractal. That is, as long as the rules are followed there are no restrictions. In any case, the trading platforms perform the calculation automatically. Furthermore, this indicator can be used in any period of time. From 1 minute candles to monthly candles.
Trading with the fractal indicator
There are several uses of the fractal indicator for trading or analyzing assets. We can use it to identify support and resistance, as buy or sell signals, or to establish trends. However, the recommended use of this indicator is set out in the Bill Williams trading system. According to Bill Williams, the use of the fractal indicator only makes sense if it is used as dictated in your trading system.
That said, aside from Bill Williams' trading system, the main uses for technical analysis of this indicator are:
Identify supports and resistances
Draw trend lines
Establish stock trends
This point may seem somewhat more complex at first. However, the basis is simple. If the price breaks more bullish than bearish fractals, the trend is bullish. The green lines indicate the bullish fractals that the price has been breaking. The red lines indicate the breaking of the bearish fractals. Obviously the stock trend is bullish. Hence there are 8 green lines and only one red.
From these uses you can establish different ideas to open long positions or short positions. Or even better, ideas to build a trading system.