Fractals trading: break your chart into bite-sized pieces

In case you missed it, the big news on TikTok last month was that men think about the Roman Empire … a lot.

@hannahkbrown

Never once do I think of such things. How is this real?! #romanempire

♬ original sound – Hannah Brown

And this week, Rory McIlroy said his Ryder Cup victory was inspired by Roman emperor and Stoic philosopher Marcus Aurelius.

What’s going on?

Aurelius does have some dodgy fans in the alt-right, but many people are just looking for some inspirational words on perseverance and self-discipline.

I find it reassuring that, 2,000 years before social media, the ancient Stoics were discussing how to battle procrastination …

And the advice they came up with is exactly what every school student is still told … breaking stuff down into smaller, immediate chunks.

Breaking down your charts like a Stoic

There’s a lot going on in a price chart, and we can be forgiven for finding the bombardment of information in them overwhelming.

We want to find trends … patterns … individual candlestick formations … but there’s just a jumble of data.

Technical indicators can help with this, but I want to look at the simplest chart pattern out there …

What are Fractals?

With a name like ‘fractals’ you might be thinking this is going to be some complex mathematical bit of technical analysis, but if you can count to five … you’ve got Fractals covered.

A fractal is any block of five candlesticks, in which the central candle forms a high or low.

A bearish fractal will have a high on the third candlestick, with two candles either side of it having lower highs.

It doesn’t matter what colour the candlesticks are – we’re just looking for a high, with two lower highs either side.

Likewise, a bullish fractal will have a low on the central candle, with two higher lows either side of it …

These simple formations are all over our charts – you won’t have to wait long for one to come along …

But don’t worry – this isn’t going to clutter your charts, because we’re only focused on what’s coming at us on the right edge of our charts.

When you’re looking for a candlestick pattern – this is a solid 5-period setup that’ll be along with incredible regularity.

How to use fractals in trading

Fractals are not trading signals in isolation – we need to put them into context and have a stronger reason to enter the market.

There are two indicator tools that Fractals are commonly paired with …

Trading fractals with the Alligator indicator

You can find out more about the Alligator and how it works HERE, but the basics you need to know is that these are three moving-average-based lines on your chart.

How to use the alligator indicator

If they are neatly stacked and moving apart from each other, you’ve got a trend (the Alligator is feeding).

If they are tightening in close together and intertwined with each other, then there’s no clear trend (the Alligator is sleeping).

With the Alligator showing a downtrend, we’re looking at bearish Fractals, which appear at A, B & C on the chart above. Even better, each of these Fractals interacts with the moving average lines of the Alligator indicator to give a sell signal. (Note that the Alligator comes out of feeding mode just after the Fractal at A is formed, but as the lines are projected ahead of our current price, the indicator would have shown the trend resume already at the point we’d be entering this position.)

When trading Fractals, we have a neat area for positioning stop levels, just beyond the extreme of the high/low candle.

Trading Fractals with Fibonacci retracements

Another common way to use Fractals is to look for these turning points on critical Fibonacci levels …

Here we get a Fractal forming right on the 38.2 retracement level, followed by a clear move down, offering a good profit potential.

How I use Fractals

Fractals work best in longer timeframes.

It’s important to remember that a Fractal is a 5-bar snapshot and nothing more, so we shouldn’t expect too much for them. They are easy to find, and that makes them a quick, accessible tool of what market sentiment is.

By pairing them with something like an Alligator indicator, we’re able to use them as entries into an established trend – so we can take advantage of this kind of market move.

Beware of expecting big moves from a 5-bar pattern if you’re not already in a strongly trending market.

I also find that Fractals can work as neat little breakout setups – and I’ll be digging into this in future posts.

Let me know how you get on with Fractals in your own trading.