Trading Forex with Fractals
When we discussed the top 5 ways To Improve your Mental Forex trading we saw that it is important to understand your trading system and from the discussion on how to setup a forex system # 4 we continue with the first indicator we shall be using.The Forex Fractals
What is a fractal
A Fractal is one of five indicators of Bill Williams’ trading system, which allows to detect the bottom or the top.
These basic fractals are composed of five or more bars. The rules for identifying fractals are as follows:
* A bearish turning point occurs when there is a pattern with the highest high in the middle and two lower highs on each side.
* A bullish turning point occurs when there is a pattern with the lowest low in the middle and two higher lows on each side.
Using the forex usdchf daily chart below we see an example of a Down (bearish) Fractal at point A and an exmple of an Up ( bullish ) fractal at point B.
How to Trade Using Forex Fractal
Fractals essentially break down larger trends into extremely simple and predictable reversal patterns.You can use them for in various ways.
1. Finding the Forex Trend
In an uptrend a series of up fractals are broken more than the down fractals. the more bullish fractals are broken, the stronger the uptrend.
In a down trend, a series of down (bearish) fractals are broken more than up fractals. In the forex chart below we note how we have been breaking down fractals in the USDCHF pair since the fractal at point C ( August 6th 2007) to point D (September 30th 2007).
2. Consolidation
It is easy using fractals to identify ranging or consolidating areas. If prices move up and down between up and down fractals and cannot seem to open above or below the most current up and down fractals then the market is consolidated.
For example the Down fractal at point 2 (August 27th ) and the up fractal at point 1 (August 21st created a great consolidation point until Septmber 6th 2007 when then market crashed below the point 2 fractal.
3. Breakout points
One of the ways I use fractals is simply to use them as breakout points .This is especially true in the longer term forex trading charts. They especially work very well in daily ,240 min and 60 min charts. The rule of thumb is to wait for the price to open below a fractal and trade in that direction.
When used with other indicators it can be fantastic.
What other indicators work with Fractals ?
1. Trendlines
Most new traders do not know how to draw a proper trend line. by simply using only the bars with the fractal arrow as your trendline points, it makes your forex trading very easy. The example in the forex chart below shows the last up bullish trendline drawn from fractal.
The trendline is from point 3 to point 4
2. Other Indicators are
Moving averages
Bill Williams Awesome Indicator
Bollinger Bands
We shall discuss these later.
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Hugh Gordon
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Does anyone have a recommendation for who to trade forex with. I’ve heard many different answers but I’m not sure if their the best… I’d like some hard information to help me make my decision. I was thinking about trading with FXCM or FXSol but I heard of no customer service. Does anyone know about Forexte? Someone recommended them but I haven’t heard any experiences… I know they have Metatrader and eSignal which I’m interested in using. Their site is http://www.forexte.com if you haven’t heard of them. Thanks
Would this work for currency futures also? I trade at http://www.lotusbrokerage.com/ on x trader. I guess it would work but I am not sure