A Trader’s Guide to Using Fractals in Forex Trading

A Traders Guide to Using Fractals

Trading with Fractals is one of the hottest topics on the Forex market right now. Why are they so hot? Because traders who understand and apply these techniques are seeing their profits skyrocket. So if you’re interested in learning how to use fractals in trading, we have some answers for you!

Dangerous indicator

Trading with fractals is all about setting your stop loss and taking the time to watch the indicator. It is imperative that you learn to look at the indicator as an enemy instead of an ally. If you see an indicator that looks like a triangle, make sure you get rid of it immediately. If you see a triangle that resembles a bell, do not follow the bell, wait for the price to drop before entering into a trade.

Stop loss with Fractals

This may sound crazy, but it is an essential part of trading with Fractals. You should always keep the stop loss in mind and try to take a position in the opposite direction of the indicator that you are following. Now this may sound counter-intuitive, but in the cases of many expert traders it has worked very well. If the price takes an extreme turn downward, you can quickly move your stop loss further out to the right and try to catch the break. Once you enter into a profitable trade, you can reverse your position and try to get out before the price bounces back upward.

Technical indicators with charts

The other important thing to remember when trading with Fractals is to be observant of your own chart. It is easy to become blinded by price movement because you’re looking at: 

  • Simple bar; 
  • Candlestick chart. 

In reality, most technical indicators only tell you how far the price will move in either an up or down direction. However, a good indicator will also provide you with charts that break down the movement of the indicator itself. These charts show you exactly where the breakouts are taking place so that you can enter when the price is heading in the same direction as your indicator.

Important patterns

As stated earlier, most technical indicators can break down the movement of the indicator using boxes and arrows. Your stop loss and position target will likely be based on these patterns. One common pattern is a sharp rise in the price followed by a rapid drop back down. To profit from this, you must take a quick sell and quickly enter your exit position. Since it’s likely the price will continue to move in the exact opposite direction of your signal, if you don’t get out before the reversal, you’ll lose money.

How to use Fractal analysis

This may seem confusing, but Fractals are simple enough to understand once you learn how to use them correctly. The most common way to use a Fractal analysis is on a daily chart of the price chart. Simply look at the key bar, and notice the points that form a perfect triangle, or Fibonacci ratios. These points, along with the peak and the bottom are called points of support and resistance, respectively. 

Since a Fibonacci ratio is formed by the number of times the price closed out (hope), this indicates strength within the market. Since every successful trading strategy takes into consideration at least one of these points, it’s easy to see how an indicator like this can predict trading opportunities.

Best strategy for beginners

For beginners, it’s best to start off by practicing with a simple Forex trading strategy like: 

  • The triangle method;
  • Basic breakout strategy. 

Once you understand how these patterns work and can apply them to your daily chart, then you can take it a step further and start exploring the more advanced techniques. But for now, try to stick to the basics as mentioned above, and keep looking for the breakouts at the end of the day. You can begin applying stop losses and other methods of analysis when the price reaches a new high or low.

Relative strength theory

Another useful tool in your arsenal should be an indicator. Indicators can provide you with important information when it comes to triggering stop losses and other necessary actions. There are many types of indicator and they include: 

  • Moving average convergence/Divergence; 
  • MACD; 
  • Simple Moving Average Convergence Divergence; 
  • RSI indicator. 

They are based on relative strength theory. Regardless of which type of indicator you decide to use, it’s always important to start with a solid foundation of technical analysis, stop losses, and a reliable stop loss in place before you even think about using any other form of trading strategy.

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