Forex Fractal Indicator is one of several technical analysis oscillators created by Bill Williams, the world-famous trader. Other AT indicators he created include Awesome Oscillator (AO), Accelerator Oscillator, Gator, and Alligator. A major advantage of these indicators is that they are completely compatible and can be successfully used in more or less complex transactional systems and investment strategies. For example, combining Fractal and Alligator indicators is very popular among investors and speculators is. As usual, however, it is best to match the indicators to yourself and your strategies through trial and error, and of course, using back-tests, i.e. testing the strategy on historical data, which is available on many popular trading platforms, for example, on the MetaTrader 4 platform, where we will also find pre-installed all Bill Williams indicators. And it does not matter at this point whether we want to open short positions on the forex, commodity or CFD market or build long-term investment portfolios from the 20 blue chip stocks of the Stock Exchange and the US S&P 500. The indicators need to be tested.
The popularity of the indicators created by Bill Williams did not come out of anywhere. All his work is based on the most basic assumption, which at the same time is the absolute foundation of technical analysis of financial markets – on the cyclicality of the market and quotes. In Bill Williams’s work, we can find references and similarities to Elliott, the creator of the famous wave theory. Of course, Elliott’s wave theory can be speculated, but the cyclical nature of financial markets, which is so closely related to market psychology, i.e., in fact, human behaviour is indisputable. Therefore, we can not ignore any of Bill Williams most important work.
Construction and operation of Fractal indicator
Fractals are one of the five most important tools of technical analysis in financial markets created by Bill Williams. They have been developed to highlight local peaks and troughs in the chart and thus they serve as a tool for determining local support and resistance levels. At first glance, you can conclude that Bill Williams’ Fractals do exactly the same thing as the extremely unsuccessful and useless Zig Zag indicator, the use of which in the current trade is really impossible and can be utilized only for analyzing historical data. Fortunately, it only looks this way – fractals do not change their position after the creation.
Now a bit more about Bill Williams’ Fractals. The peak is marked by an indicator, when the middle candle among the five candles is the highest, which means that two candles to the left of this candle and two candles to the right of it are lower. The trough is marked when the middle candle among the five candles, the third one, will be the lowest. This means that both candles to the left of it and the two candles to the right of it must be higher than it. On the chart, the fractals have high (the highest in a given period) and low values (the lowest in this period). They are marked with very characteristic up arrows (in the case of the peak) and down arrows (in the case of the trough).
Application of Fractal Indicator
By definition, the Fractal alone is not used in trading. It is always a part of a more or less complex transaction system. The most basic of them is the combination of Fractal and Alligator indicators. For the sake of accuracy, a few words about the Alligator indicator. Its most important purpose is to indicate the right moment to take a position on the market – but it does not indicate whether it is a long or short position. Alligators’ lips, teeth and jaws, that is, three moved, smoothed, moving averages depict how three different time periods coincide. The blue line is the alligator’s jaw. This is the balance line for the entire period that was used to build the chart. Mathematically speaking, it is a 13-period moving average from half of the maximum and minimum amount of these 13 periods, moved by 8 bars into the future. The red line is the alligator’s teeth. This is a balance line calculated for a much shorter period of time – it is an 8-period moving average from half of the maximum and the minimum amount, moved by 5 bars into the future. The last line, green, is the alligator’s lips. Alligator’s lips are 5-period moving average from half of the maximum and minimum amount, moved by 3 bars into the future.
The Alligator’s philosophy can be best explained through the words of its creator – Bill Williams – market trends occur only for 15 to 30% of the entire time of quotations. Therefore, it is very essential to keep up with and follow the emerging trends. In addition, it is important not to invest or speculate at a time when the price of a given instrument changes significantly only in one specific period. The signals that the technical indicator Forex Fractal gives us should be filtered by means of this analytical tool Alligator. Fortunately, their common use is quite easy, although it requires some experience. Later we see the signals at first glance.
In conclusion, we should not open long positions when the fractal is below the line of Alligator’s teeth, i.e. red line, and we should not effect sales transactions when the fractal is above the line of the Alligator’s teeth. When we receive a signal (whether it is the buy or sell), it keeps its strength all the time until it is the Alligator’s jaw and remains the signal until a fresh signal emerges. In addition, it is also worth to use this indicator to set up pending orders – buy stop above the last marked peaks and sell stop below the last troughs. There are many applications for Bill Williams’ indicators. How well they will be used by us depends only on our diligence, determination, and imagination.
However, it has to be admitted that you need some experience to successfully use Bill Williams Fractals. During testing, it is easy to see that there are a lot of signals. However, they must be approached with a grain of salt and filtered accordingly – for instance using the above mentioned Alligator. It is also worth checking out Fractals in conjunction with the Awesome Oscillator, as well as the most popular MACD or RSI. This will, of course, be a very time-consuming task, but it is worth it. This work should pay off in the form of really strong, concrete, though not necessarily very frequent trading signals.
Advantages of Fractal
- Compatibility with other Bill Williams’s indicators
- Can be used at different intervals
- Ability to use for both current trading and historical analysis
Drawbacks of Fractal
- The indicator settings can not be changed
- Very large number of signals needed to filter