What is a Fractal?
Before even starting this educational project on Trading Academy, we need to specify what is a fractal, where can be found and what to do with it.
A fractal is an indicator offered by all trading platforms around the world and, depending on the period it takes into consideration, is used for finding possible tops/bottoms of the markets.
For example, the fractal indicator is used on the monthly chart or even the weekly one, or if the period taken into account for calculating the fractal is, say, 10, then it is taking into account the last 10 candles.
Introducing the Fractal Indicator
The fractal indicator displays an arrow on top of the candle, if the fractal is bearish, or below the candle, if the fractal is bullish. This tell us should be buy or sell CFDs.However, the most important thing to remember is that fractals are repainting!!! This means that once a fractal appears, let’s say, on top of a candle, and market goes and makes a new high within the period the fractal is set up, then the fractal will disappear and a new one will appear at the top of the next candle.
This is confusing and something to be aware of as if you put the indicator on any time frame and look back to test historical results, it would appear that pretty much it is showing the top and the bottom. While that may be very well true, it is important to know that those results are there to stay only after the fractal’s period ends.
In order to avoid overtrading, fractals can be used as contrarian signals. This means that by the time a fractal appears, an arrow appears on top of the candle on the chart the indicator is applied. That arrow stays there until the highs are going to be broken in a bearish fractal or lows are going to be broken in a bullish fractal depending very much on the setups the fractals has as sometimes the highs or lows of a group of candles are being taken into consideration before the fractal is invalidated.
To be used as a contrarian indicator, by the time the fractal is invalidated one should go and trade in the opposite direction. This means that after a bullish fractal, if market is reversing and takes the lows, a put option or sell order should be traded with a bigger investment than the original one as it means the previous fractal was a fake move.
Fractals have the advantage of being extremely visible and this makes them extremely attractive to trade but unfortunately the fact that the indicator is repainting is making it extremely difficult to take a trading decision based on it.
Do fractals repaint
Other indicators that fall into the same category are the zigzag indicator that basically it is starting to draw a line from a high and then that line is staying on the screen until market is reversing and breaks the previous high. But, like in the case of the fractal indicator, the zigzag or the line will simply vanish in front of the new price action and all analysis that was considered valid is invalidated.
The whole category of indicators that are repainting should be interpreted as being difficult to master without integration with another system or indicator. For example, such an integration can be by using the fractals with divergences and another oscillator.
If the RSI (Relative Strength Index) is diverging from price (meaning market is making a series of higher highs or lower lows but the oscillator is not confirming it), it means a divergence appears and should be traded. The way to find out the perfect striking price is to wait until a fractal appears on the screen as the potential of a top after a bullish move or a bottom after a bearish move is pretty highs.
Expiration dates to be used depend very much on the time frame the fractal indicator is being placed and on the type of the fractal that is being used, meaning it depends on the periods the fractal is taking into consideration.