- The Williams Fractal indicator detects patterns known as fractals.
- The fractals are made of five or more bars.
- It helps traders spot potential bullish and bearish price reversals.
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Traders are integrating new methods into their market analysis to get an edge. This article about the Williams Fractal Indicator is going to reveal a relatively new method of discovering price patterns. It also shows ways of discussing an indicator that instantly flags up the patterns on a chart for traders.
The indicators detect patterns known as fractal patterns. Prices create repeating patterns and trends, even though they may seem random. One of the most basic repeating patterns is a Williams Fractal pattern. They are simple five-bar reversal patterns.
Five or more bars make the fractals. The rules for detecting them are as follows:
- You can see a bearish turning point when there’s a pattern with the highest high in the middle and two lower highs on each side.
- A bullish turning point happens when there’s a pattern with the lowest low in the middle and two higher lows on each side.
Even though prices may appear random, they show themselves through repetitive patterns, such as Williams Fractals.
Bill Williams created and described them, in his book “Trading Chaos”. He was a well-known trader, author, and instructor, who had more than 50 years of trading experience across various markets.
Bill was popular for his ideas on the psychology of trading, chaos theory, and its application to technical analysis. He viewed the market as having 5 dimensions that help traders understand the structure of the market, and he created many famous indicators.
What is Williams Fractal trading indicator?
The Williams Fractal strategy indicator aims to discover reversal points (lows and highs) and mark them with arrows. Up fractals and down fractals have particular shapes. The Williams Fractal setting helps users know the direction price will develop. It is mostly used it together with the Alligator Indicator with particular rules on when to enter and leave trades.
A long signal happens when the fractal is higher than the teeth of the alligator. A short signal happens when the fractal is lower than the teeth of the alligator.
The idea that makes the indicator is that there is repetition in price behavior and fractals can offer an insight into the repetition patterns. The indicator mostly resembles a five bars model. It is created to identify possible reversal points and determine the direction of the price.
Traders should look out for five successive price bars where the third bar shows the highest high or the lowest low to detect a Williams Fractal calculation.
Remember that traders can only see the fractal trading indicator arrow below or above the third candlestick if it is the highest or the lowest of the five bars. Additionally, Williams suggests that you don’t have to incorporate five bars to make a fractal.
How trading platforms show the indicator
Arrows found immediately below or above the price bars on charts show the Williams Fractal trading strategy.
Buy fractal is the arrow higher than the candlestick and sell arrow is the arrow lower than the candlestick.
A buy arrow describes the first one because it serves as a resistant point. This means that when the price moves beyond this level, a buy signal will happen.
The sell fractal acts as a support level and price moving lower than this fractal can mean a potential sell opportunity. The fractal indicator can offer more reliable alerts on higher time frames. But it will also show lesser signals.
How to use fractals in trading
A lot of traders still use the fractal indicator, even though some traders consider it outdated for today’s markets. A strategy is a vital tool for defining trading strategies, and it traders can use it as follows:
- For detection of potential stop-loss levels
- They can serve as support and resistance levels
- To know the highs and lows
- Signal potential entry points
- Fibonacci retracement levels uses them
Pros and Cons
Pros of the Williams Fractal indicator
- It is simple to use and to detect potential trading signals and other alerts, once the trader understands the idea behind the fractal trading indicator.
- The indicators show potential resistance and support levels of buy and sell positions, except for the highs and lows.
- Traders can use fractals as an additional indicator when determining the trends.
- They can identify potential breakouts.
Cons of the Williams Fractal indicator
The obvious disadvantage here is that fractals lag behind indicators because they a 2-bar delay draws them. But the most important trend reversals continue with other bars.
After the identification of a trend, the price should increase after a bullish fractal, or decrease after a downward fractal. Further weak points of this indicator include:
- It will lag by some bars because to complete a fractal, traders will need two closed bars. This means that when it offers a signal, the price may be at another level compared to the signal.
- Traders should trade fractals during the trending market, traders need to avoid using the indicator during a sideways moving market.
- Traders should pay attention to the formation of fractals because some of them may give misleading signals.
Application of Williams Fractal indicators
Fractals show breakpoints
As fractals show the points where the trend has not held up, a new force can happen when the price goes beyond the previous fractal. The trading of breakpoints is therefore an obvious and simple application of the fractal indicator.
Using Fractals as the linking point of trend lines
Fractals can give an advantage to traders because others also use the same obvious prices to determine their trend lines. The fractal indicator makes it easy to detect and connect the most important high and low points so as you can draw trend lines.
Using Fractals to confirm a trend
You can see new fractals as a trend progresses, whether uptrend or downtrend. The first sign of price consolidation is when the breakthrough a previous fractal fails.
Trading using Fractals
The fractal indicator is one of the five indicators used in the trading system Bill Williams created. Filter the fractals based on your trading strategy, by making use of a confirmation indicator. Traders regularly use the alligator. Three moving averages make the indicator.
Applying Fractals to trading
A lot of charting platforms now offer fractals as a trading indicator. This means that traders are not required to hunt for the pattern. Apply the indicator to the chart, and the software will highlight all the patterns. After doing this, traders will observe an immediate problem – the pattern occurs frequently.
It is best to use fractals together with other technical indicators. It is a tool made by using various moving averages. Traders can use bullish signals to create buy signals, since the trend is up.
Draw a bearish fractal on a chart with an up arrow above it, even though it is a little bit confusing. Mark a bullish fractals with a down arrow below them.
Thus, observe for the down fractal arrows if using fractals in an overall uptrend. Notice for up fractal arrows, if looking for bearish fractals to trade in a larger downtrend.
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In conclusion
Fractals may be significant tools when used together with other technical indicators. You can use the Williams Fractal’s strategy in many various ways, and each trader may find its variation.
Using an alligator indicator is one option, and another is using Fibonacci retracement levels. Although some people like fractals, others may not. They are not a requirement for successful trading and traders should not exclusively depend on it.
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