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You Won’t Believe The Power Of Market Fractals (Support & Resistance Trading Strategies) - YouTube
Channel: The Secret Mindset
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If I show you this chart, can you tell which
time frame I’m using?
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NO!
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If you view a chart on a one minute, hourly
or daily timeframe, you wouldn’t be able
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to distinguish one from the other.
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That is because the price action on the charts
have fractal characteristics.
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We can see similar patterns at various time
frequencies.
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This is a very important topic in trading
and today you’ll learn how to correctly
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trade market fractals.
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So if you could, like, subscribe to the channel
and stick around for the full video.
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What are Fractals?
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At the very core, a market fractal is the
basic building block of price movements up
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and down.
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Fractals indicate market turning points or
swing points.
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Every support or resistance formed in your
charts first start with a fractal.
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You can see why fractals are one of the best
tools especially when trading price action.
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In any trading decision, it is critical to
find support and resistance areas, whatever
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timeframe we are looking at.
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Fractals were introduced by Bill Williams
in his book "Trading Chaos".
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Fractals are centered on the idea that there
is repetition in price behavior and they can
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provide an insight into the repetition patterns.
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The indicator usually looks like a five bars
model which is aimed to identify possible
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reversal points and detect the direction of
the price.
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In order to detect a fractal formation you
must look at five successive price bars where
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the third (or the middle) bar represents the
highest high or the lowest low.
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In an up fractal the middle bar will have
a higher high than both of the bars at either
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side of it.
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In a down fractal the middle bar will have
a lower low than both of the bars at either
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side of it.
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Keep in mind that the fractal arrow appears
only above or below the third candlestick
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if it is the highest or the lowest of the
five bars.
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A bearish fractal pattern, which indicates
a market reversal to the downside, forms when
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each of three successive candlesticks shows
price recoding a higher high, followed by
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two candlesticks showing price action with
a lower high than the high of the preceding
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candlestick.
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Bearish fractal pattern serves as resistance.
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A bullish fractal pattern, which indicates
a market reversal to the upside, forms when
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each of three successive candlesticks show
price moving to a lower low, followed by two
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candlesticks showing price action with a higher
low than the low of the preceding candlestick.
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This fractal acts as a support level.
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Fractals provide more reliable signals on
higher time frames, but it will also display
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fewer signals.
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Obviously, depending on what time frame you’re
using, the absolute amount of time required
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to form a fractal pattern varies.
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If you’re using the hourly chart, a fractal
pattern can form in five hours.
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If you trade the daily chart, you will see
fractal patterns that form over the course
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of five days.
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One of the advantages of fractal pattern is
that it is relatively easy to spot on a chart.
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Notice here how the middle bar within the
up fractal has the highest high of the entire
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five bar structure, and how each of the two
bars preceding it and following it have a
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lower high.
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This creates a level of resistance in the
market, and the expectation is for price to
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continue lower until the next down fractal
forms in the market.
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When you look at the middle bar within a down
fractal, you can see that it has the lowest
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low of the entire five bar structure, and
that each of the two bars immediately before
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and after it have a higher low.
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This creates a level of support in the market
and an expectation for price to move higher
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until the next up fractal forms in the price
action.
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The structure of the market fractals is fairly
simple to understand.
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You can build many different trading rules
and models around the concept of fractals.
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But, very important.
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The fifth candle in a fractal pattern must
close before you make trading decisions.
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This is because the price can move during
the time the fifth candle is forming.
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If price moves either above the higher high
or below the lower low, while the pattern
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is still forming, the fractal indicator will
disappear from your price chart.
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So you must wait for the pattern to complete
in order to make sure that the fractal is
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confirmed.
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How To Read And Trade Market Fractals
The fractal pattern reveals a “V” or “U”
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shaped bottom or top.
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Such a pattern of price action may indicate
a market reversal – either a previous up
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trending market gradually turning over to
the downside, or a previous down trending
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market turning to the upside.
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At a minimum, a fractal pattern is useful
for identifying at least a temporary level
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of price support (with a bullish fractal)
or price resistance (with a bearish fractal).
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So you can use fractals to determine the possible
direction of price.
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One way in which you could do this, is by
looking for broken fractals.
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A fractal is considered broken when it has
been confirmed and then the price breaks through
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either the high or the low of the pattern.
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If the price breaks an up fractal then the
direction of the market is considered up and
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if the price breaks a down fractal then the
market is considered down.
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But this is not enough.
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On their own, fractals will offer many false
signals.
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As a standalone price action tool, fractals
are quite unreliable.
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The main problem with fractals is that there
are so many of them.
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Therefore, to get the best out of them, you
must filter the signals with some other indicators
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or forms of analysis.
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You must view a fractal pattern in relation
to other confluence factors, such as support/resistance
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levels, supply and demand areas, pivot points,
Fibonacci levels or round numbers, in order
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to evaluate the strength of the fractal.
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For example, if the high point of a bearish
fractal coincides with a supply area that
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also identifies that price point as a potential
resistance level, then the fractal pattern
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is more reliable – and more likely to be
an accurate indicator of a market reversal.
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Trend Continuation & Breakouts
Fractals can help assessing the potential
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direction of a price move.
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For example, if a down fractal has recently
printed on the price chart and the overall
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trend is higher, then we can expect price
to continue higher.
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Along the same lines, if an up fractal has
recently been breached by a new price leg
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that is moving higher, that upside breakout
can indicate that price momentum may continue
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higher.
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So, if the market is in a strong uptrend,
there will be more fractals that are broken
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to the upside than the downside.
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That being said, the inability to break through
the previous fractal can give you a hint that
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the market is getting ready to consolidate,
or perhaps even change trends.
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The question then is whether or not the market
is going to turn around and break through
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the opposite direction fractal, because at
that point, the previous trend very well could
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be rolling over and changing.
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Fractals + Moving Average or AVWAP
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Another way to use Fractals is with a moving
average or with Anchored VWAP.
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I’ve talked about the power of this tool
in this video.
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Adding a dynamic level of support and resistance
allows you to stay on the right side of the
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trend.
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For example, if you get a fractal that forms
in the other direction of the trend, you simply
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ignore it, at least until the moving average
or VWAP tell you it’s time to go in that
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direction as well.
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If you have a 50 period exponential moving
average that is moving to the upside, then
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you are looking for up fractals being broken
as you not only have the fractal indicator
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pointing in that direction, but you have the
longer-term traders supporting the move as
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well.
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Or, if a down fractal appears and is located
near the moving average, then you can treat
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the previous move as a pullback, with price
founding support in an uptrend, near a moving
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average.
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3 confluence factors that signal that the
price is more likely to continue higher.
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Fractals & Trade management process
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Fractals can also be used during the trade
management process.
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We know that an up fractal can serve as resistance
during a rising market, and that a down fractal
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can serve as support during a declining market.
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As such, you can use these important levels
for the placement of stop loss and take profit
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orders.
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When multiple fractals appear around the same
area, let’s say a resistance area, you can
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set your stop loss level when entering a short
position above the highest fractal.
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Make sure you don’t place it right above
or below a fractal, leave a bigger margin,
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in case there’s some sort of liquidity hunt.
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Taking profits could also involve the use
of fractals.
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For example, if going long on a fractal, you
could exit the position once a price hits
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a bearish fractal.
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I heard some traders close their positions
when an opposite fractal appears, but this
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is a bad money management approach, because
the fractal signal will lag by a couple of
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bars.
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At least two closed bars are needed for a
fractal to be completed, meaning that when
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it provides a signal, the price may be at
another level compared to the signal.
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So don’t rely on this approach to take profits.
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Fractals are excellent for visualizing major
highs and lows and act as a support and resistance
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level.
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A better approach to take profits is a few
points above or below previous fractals.
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Multiple time frames approach
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It is best to plot fractals in multiple time
frames.
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For example, trade short-term fractals in
the direction of the long-term ones.
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And focus on long signals during larger uptrends,
and on short signals during larger downtrends.
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In day trading setups for example, you could
base your trades on support and resistance
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areas offered by fractals on 4hour and daily
chart.
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You can check the 30 minutes or the hourly
time frame to look for entries, but you’ll
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use fractal periods on the higher timeframes
to spot support and resistance areas.
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In this example, you look for reactions at
this resistance level, given by the fractals
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on H4 and Daily time frame and trade on 30M
timeframe.
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Trading in lower timeframe lets you to read
price action while watching important support
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/ resistance levels on higher timeframe.
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If price breaks this major resistance here,
it can be a potential breakout setup.
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If it rejects the resistance, it can be a
decent reversal setup.
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This price action approach might not be suited
for beginner traders, but if you are an experienced
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trader, fractals could be of great help, perfect
for finding areas of value on your chart.
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Look for areas where multiple fractals form.
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And mark those areas.
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If multiple fractals form around a certain
level, and price is unable to go through,
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that zone is an important one.
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Fractals limitations
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Now let’s be clear, Fractals do not predict
the price.
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They offer lagging signals.
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The arrows for the pattern are typically drawn
over the high or low point, which is the middle
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of the fractal, not where the fractal completes.
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Therefore, the arrows can be visually deceiving.
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So be careful, since the pattern is actually
completing two bars to the right of the arrow,
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the first available entry point after seeing
an arrow is the opening price of the third
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bar to the right of the arrow.
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I wouldn’t base my entries on the appearance
of a single fractal.
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Fractals has practical meaning only as part
of a comprehensive strategy, and only for
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periods of more than one hour.
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Another disadvantage of trading fractals is
the fact they occur quite frequently in the
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ordinary course of price action movement – therefore,
the pattern is prone to giving many false
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signals.
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That’s why few traders rely only on the
fractal indicator for trading signals, instead
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they are using it in conjunction with other
technical indicators.
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Remember: the longer the time period of the
chart, the more reliable the pattern.
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So look for fractals on the hourly, H4 and
daily time frames.
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If you found value and learned something new,
leave us a like.
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This way we’ll know if you'd like to see
more videos like this one.
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And check out our academy program if you want
to further level up your trading.
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Until next time.
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