What is Fractal Trading Strategy?
Fractal trading is a strategy used in the Forex market to identify and trade larger trends within the market. The Fractal trading strategy does not differ from any other type of indicator used by technical analysts.
Each technical tool has its merits and demerits
All indicators used in the financial markets are lagging tools
The financial market is a repetition of patterns, and trends and these trends or patterns are never-ending.
What do I mean by never-ending?
You see these patterns repeat themselves in different time frames.
What is a Fractal?
Fractal is a pattern that self-replicates indefinitely meaning a recurring pattern. The strategy is based on the idea that trends often form repeating patterns of highs and lows, which can be used to identify the larger trend. This strategy involves the use of fractal patterns, which are patterns in price action that repeat themselves over different time frames.
Trading fractals is also a unique method of following trends or market patterns.
A fractal pattern simplifies the formation of the price of an asset and enables the trader to see clearly the trend reversal.
A fractal trading strategy is a trend reversal pattern, they are composed of 5 or more candlesticks or bars.
Types of Fractal Trading Strategy
Many traders in the financial market use the fractal indicator for easy identification of trends. Traders can identify and trade these fractal patterns in order to identify the larger trend and take positions accordingly.
There are two types of fractals:
1. Bullish Fractals
2. Bearish Fractals
The bullish fractal pattern is a bullish turning point that occurs when two candlesticks form two higher lows on the left and right, while the lowest low candle is formed in the middle.
The bearish fractal pattern is a bearish turning point that occurs when the highest high candle forms in the middle and two lower highs candles on each side.
The two explanations above exist for basic perfect fractal formations. However, we could also have imperfect fractal formation. But the perfect pattern formations are valid for profit-making.
How to Trade Fractal Trading Strategy
How do you trade with fractal indicators? Fractal indicators are available on tradeview and some other software companies make them available on MT4 / MT5 while trading with a laptop.
Fractals are lagging indicators and must be treated as one.
Fractals are used with candlestick pattern formation, moving averages, and other well-established trading tools such as Fibonacci retracement, alligator indicator, and a few others.
Fractals are not to be used in isolation for trading, they can be used as a trend finder indicator.
Fractal indicators show up arrows when a bullish turning point is formed showing a potential to buy trade.
Also, fractal indicators show down arrows when a bearish turning point is formed showing the potential to sell trade.
Using fractals in higher time frames shows a better profit margin than using them in a lower time frame where you see far too many fractal formations.
How do You Identify a Fractal in Forex Trading?
A fractal is typically identified by its self-similarity, which means that it has a repeating pattern at different scales. It is also characterized by its complex, detailed, and often irregular shape. In forex trading, fractals can be identified by looking for patterns of highs and lows that form a five-wave pattern. This pattern will typically have two higher highs and two lower lows with a high or low in the middle. When these patterns are identified, traders can use them to anticipate reversals in the market.
Fractal Indicator Vs. Chart Patterns
Fractal indicators are limited to 5 candlestick formations but chart patterns are more extensive and differ for trend or ranging markets.
Profit your trade-in fractals trading, fractals are only best used in a trending market and never in a ranging market.
Fractals are often lagging while chart patterns are direct and can easily be triggered for entry and exit.
The mastery of fractals and chart patterns guarantees a high winning ratio.
Limitations of Fractal Trading Strategy
Fractals are not easily identified by beginners being a 5 candlestick formation.
Trading fractals on lower time frames could cause more harm if a trader looks to make more profits than expected.
Trading fractals could cause too many false signals and could take you out of trades too early with losing streaks.
Fractals are to be used with other trading tools and never in isolation.
Conclusion
The fractal trading strategy is especially useful in the Forex market, as it can be used to identify and take advantage of larger trends that are often difficult to see on smaller time frames. You have learned:
What fractal entails
Types of fractals
How to trade fractals
Fractal indicator Vs. Chart patterns
Limitations of fractal trading strategy, and
Fractals are to be used in conjunction with other technical tools.
