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Follow The Fractal Tool Toward Better Breakout Entries

Follow The Fractal Tool Toward Better Breakout Entries

Tyler Yell, CMT, Currency Strategist


Talking Points:

  • Fractals Defined
  • How Traders Can Use Fractals
  • Real-Time Fractal Set-Up

“You can either buy low & sell high or trade with the trend, but you cannot do both.”

-Bill Williams

Many traders spend too much time looking for the best possible entry. However, the entry can be based on any number of technical indicators. For traders who are a fan of price-action, you could do no worse than finding triggers based on a fractal breakout in the direction of the trend.

Fractals Defined

Let’s start with an introduction to fractals. The actually are applied to trading from nature and not the other way around. It may be helpful to know that fractals are effectively a way of looking a sub-sets of large pieces of data to understand what developments are being created in real-time. From a trading / market perspective, fractals are an indicator highlighting the chart’s local highs and lows where the price movement reversed marking a 5-bar high or low. These reversal points are called respectively Fractal highs and lows.

Learn Forex: The Hand is a Perfect Fractal

Before we take this natural reoccurrence to the market, you should see how your hand, with fingers pointing up is the perfect up fractal and with your palm facing you, is a perfect down fractal. A Market swing Fractal shows a price extreme in the middle of 5 bars whereas an up fractal has the middle bar with a highest high in the middle with two lower highs on the left and two lower highs on the right. A down fractal will have a low price extreme in the middle bar of a 5-bar sequence with the higher lows on the left and two higher lows on the right.

How Traders Can Use Fractals

Volatility is a key determinant to trading opportunities. One of the common triggers that volatility is in play is when a prior high or low is taken out and a new trend begins. Fractals can be applied to the chart so that you can see when a recent key level has broken which can lead to a price-action trading opportunity.

Learn Forex: Pinpoint Key Price Action Swings With Fractals

Presented by FXCM’s Marketscope Charts

Fractals revolve around price action highs and lows and can easily pinpoint places for a breakout entry or tight price action based stop. If you’re not comfortable with price-action analysis, register for our free online price action course here.

Fractals can be used in a variety of ways. Most commonly, traders will look for a bar to close above a prior up fractal to show an upside breakout or a close below a prior down fractal to signal a downside breakout that is potentially worth trading. Another positive aspect is that when you have a comfortable view of a strong trend in play, you can use fractals as a trailing stop from a prior counter-trend move which made a fractal.

Learn Forex: USDOLLAR down Fractals Have Been Stair Stepping Higher since Recent Reversal

Presented by FXCM’s Marketscope Charts

Real-Time Fractal Set-Up

For purpose of review, fractals mark price changes or pivots in the market. For reasons known or unknown, they are reaction points that can help you spot key places to place an entry order or stop. From a trader’s stand-point, they allow you to enter on a confirming view of your analysis vs. a hunch that a market is oversold or overbought and is time to enter like this trade set-up on the Australian Dollar.

Learn Forex: A Fractal Based Entry on AUDUSD

Presented by FXCM’s Marketscope Charts

Every trader should embrace the following seven words:

I don’t know what will happen next

This isn’t meant to disregard your analysis but tell a simple fact about trading. Anything can happen in the market place and an infinite number of possibilities are plausible. As a trader, we can develop a strategy with set rules that work with our psychology to give us an edge but it will not predict the future. Therefore, we can use fractals as a trigger to put us into a trade or out of a trade and we may not know if the trade will end in a profit but we can now that we’re only acting on objective evidence.

Happy Trading!

---Written by Tyler Yell, Trading Instructor

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DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.