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Understanding Fractals in Currency Trading
Written by: PaxForex analytics dept - Wednesday, 23 May 2018 0 comments
The concept of the fractal is more than just a strategy idea. It is a way of understanding forex price action and trade flows at their most fundamental level. Fractals are indicators on candlestick charts that identify reversal points in the market. Traders often use fractals to get an idea about the direction in which the price will develop. A fractal will form when a particular price pattern happens on a chart. Fractal trading is only one of the evaluation methods which is effective during the periods of a stable trend, while in a wide flat can be unprofitable.
The use of fractals in forex trading can inform the trader of potentially rewarding reversals in price movement. While the fractal indicator is not associated with the mathematical phenomenon of fractals, it nonetheless refers to recurring patterns that appear in the auction cycle of any trading vehicle. When looking at past price charts, the presence of fractals at key turning points is obvious. They consist of five price bars with the highest point in the middle and lower highs on each side. Identifying these patterns is easier in hindsight than in real-time trading. In combination with other indicators, it is possible to predict when a fractal may appear.
Fractals (developed by Bill William) are indicators on candlestick charts that identify reversal points in the market. Traders often use fractals to get an idea about the direction in which the price will develop. A fractal will form when a particular price pattern happens on the chart. The pattern
itself comprises five candles and the pattern indicates where the price has struggled to go higher, in which case an up fractal appears or lower, in which case a down fractal appears.
Price movements in marketplaces are often thought to be random and chaotic. Yet, as with other seemingly-random forms found in nature, fractal patterns can be observed in price charts of forex pairs and other assets. Forex price movements show certain repetitive fractal patterns which can be profitably traded. Fractals used in forex trading may show the same format every size scale, or they may show nearly the same format at different scales. Stated simply, in forex trading a fractal is a detailed, self-similar pattern that repeats itself, often many times over.
Fractals can be plotted in multiple time frames and used to confirm each other. One simple rule is to only trade short-term fractal signals in the direction of long-term fractal signals since long-term fractals are the most reliable. Not all traders find value in using fractals when placing bets. The time lag needed to produce the point of inflection limits returns. Also, sudden market movements can erase a trend a trade is following. That said, fractals present an easy way to remove some risk as you follow greater trends in a security's move up or down. When a fractal shifts direction, it's a quick indication to get out of your position.