Trading strategy with fractals
Fractals are the technical tools helping to predict a reversal of the dominant trend. A fractal pattern consists of 5 consecutive bars positioned in the predefined order. There are two types of fractals.
A reversal from an uptrend to a downtrend occurs when the highest bar is located in the middle of the pattern and the two bars with lower highs on each side.
A reversal from a downtrend to an uptrend occurs when the lowest bar is positioned in the middle of the pattern with the two higher lows on each side.
Fractals are known as breakout points since they highlight the points at which prices fail to hold and reverse. Fractals are very useful trading tools that help to identify powerful resistance and support levels. Also, they are very handy in the lineation of trends.
There is a countless number of trading strategies using fractals for confirmation of the trend, for identification of the trend reversals. In this article, we decided to present one of the most effective trading strategies in which fractals are used to pinpoint profitable entries.
Timeframe – hourly charts are preferable, but you can also use this strategy on the daily, weekly, 4H timeframes.
Currency pairs – no specific recommendations; the strategy suits to all currency crosses.
Trading session – any
50 exponential moving average (thereafter 50 EMA)
Bill Williams Fractal indicator
“Rules of the game”
For short trades:
a bearish fractal should be formed near the 50 EMA line;
look for a formation of the bearish candlestick pattern or any other signal to confirm the trade before going short at the close of the fifth bar;
if the trade is confirmed, you are allowed to open short position at the close of the fifth bar and place stop loss 33 pips above the middle candlestick (the highest point of the fractal pattern).
For long trades:
a bullish fractal should be formed in the vicinity of the 50 EMA line;
use a bullish candlestick pattern for confirmation of your trade before going long;
if the trade is confirmed, you are allowed to open long position and place stop loss 3 pips below the fractal candlestick (the lowest point in the fractal pattern).