Trading with fractals is not very common, but the idea of fractals is well known among traders. The term comes from mathematics, more precisely from geometry. The idea of the fractals is based on the assumption that certain patterns are always repeated and that, if you put a lot of such patterns in a row, a similar pattern is again formed.
From this it can be deduced that the structures are all the clearer the more patterns you put together. As developer Bill Williams says, chaos creates a certain order. Anyone interested in fractals, which by the way have also been proven in biology, will find enough information on the Internet. In trading, fractals take advantage of the similarities of the patterns in technical analysis.
What is the fractal indicator made of?
Fractals are represented in the course as triangles. These triangles are intended to indicate reversal points of the current movements. The definition is quite simple from either a high and two lower highs next to it or a low and two higher lows next to it. You can identify SKS formations on a short-term basis.
The upper chart shows the S&P 500 Future with 1-hour candles. You can see that fractals in this sense are nothing more than the identification of highs and lows. They should therefore only be an aid to the analysis and less an independent indicator. The trader then has to decide which pattern to use or how important he considers it to be.
If a fractal points up over a candle, it means that the two candles in front and the two candles after one have formed a lower maximum value. If a fractal points downwards, the two candles before and afterwards have reached a higher low.
Seen in this way, the fractal "indicator" has little in common with the fractal geometry, because it is much more complex. The interpretation of the fractals is theoretically simple, but not so easy in practice. Because if you look at the chart, you can see a plethora of reversal points, which - if really traded - would have resulted in many losses.
Trading with the fractals
You cannot use every possible turning point for trading. Since fractals are identified quite easily in this indicator, further rules have to be defined in order to only get highly reliable reversal points.
In practice, the following rule often applies. There must have been a strong trend. If we look at the chart again, this is no guarantee that the fractal shows reliable reversal points. We therefore have to set another rule. We expand this when identifying reversal points. We are not saying that the fractal indicates a reversal point; rather, three fractals must be visible next to each other at lows higher and next to it at highs lower.
If we follow this rule, we can certainly get a filter. The first turning point was definitely reliable. In the second, which is actually not one, no deeper fractal pointing upward was formed. The third represents a reversal point according to the rules, but in the following it only gave a sideways phase and thus only a short-term reversal signal. The fourth reversal signal is still valid.
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Conclusion - Fractals are only of limited use as an indicator
Fractals are an interesting indicator. However, if you go after the definition and calculation of this, you ask yourself whether you need it in this form as an indicator at all? Rather, it can be used to help identify lows and highs. If you continue to optimize it by several rules, as shown above, it will work better.
We will see in the next post how we can optimize the fractals to the extent that they can really help us as a tool. With the broker StockPair, interested parties can get in the mood for trading shares and other values. The broker has more than 150 assets in the program.
Here you will find information on the DeMarker indicator.