The Fractals is a technical indicator, which helps to define the bottom or the top of a market. It was developed and designed by psychologist and trader Bill Williams. Fractals is one of his five indicators described it in his book Trading Chaos. Unlike any other indicators, this one is not a line or histogram bars. It is just a simple arrow on top of or below the bars of the price chart. These fractals are formed when five consecutive bars align in a strict manner.
Fractals can be two types – bullish or bearish and consist of recurring price patterns, which can be used to confirm price trend reversals. They need to consist of at least five bars, and are typically plotted as a set of high and low arrows superimposed over the reversal points in the price action.
We have bearish fractals when the price pattern has a highest high in the center, flanked by two lower highs. Analogically, in the bullish fractals the price pattern has a lowest low in the center, flanked by two higher lows.
Fractals are lagging indicators, which means that they do not have predicative value for the price since they follow it. Experts recommend the use of other indicators to confirm that reversals have indeed occurred. Fractals are well combined with Alligator indicator. Fractals are filtered by the Alligator, which means that a trader should not close a buy transaction, if the fractal is lower than the Alligator’s Teeth, and should not close a sell transaction, if the fractal is higher than the Alligator’s Teeth.
The calculation is the following:
- An UP Fractal exists at n if the following conditions are met:
High(n-2) < High(n)
High(n-1) < High(n)
High(n + 1) < High(n)
High(n + 2) < High(n)
- A DOWN Fractal exists at n if the following conditions are met:
Low(n-2) > Low(n)
Low(n-1) > Low(n)
Low(n + 1) > Low(n)
Low(n + 2) > Low(n)
Where: n is the number of the time period bar in question, High(n) is the high price traded during time period n and Low(n) is the low price traded during time period n.