Fractals are technical candlestick patterns used to identify potential turning points on price charts, providing perspective on market volatility. They are based on repeated price patterns and thus capture moments when the market changes direction. In addition, these figures are easy to identify because they are very visual.
How are fractals formed?
A fractal is a pattern that is always formed by a set of five consecutive candlesticks. In this pattern, the central candlestick has the highest high or lowest low, surrounded by two candlesticks on either side with lower highs or lows. Bullish fractals suggest an upward movement, while bearish ones expect a decline. The example below helps us understand better:
The first bearish fractal (small red dot that materializes it) is formed, while the 2 candlesticks that preceded it on the left had two peaks lower than the top of the fractal, and on the right it is the same, with 2 candlesticks, which also have lower heights than the fractal, which is the central candlestick.
On the bullish fractal it is the opposite, the low points of the two candlesticks before and the two candlesticks after are higher than the low point of the fractal.
It should be noted now that this is a lagging indicator because to confirm the formation of the pattern you need to wait two candlesticks later.
In this visual example from the CAC 40 quotes, the two fractals proved to be completely predictive as the first, bearish, really marked the market peak before a reversal wave. Conversely, the next, bullish, signaled an improvement.
Usefulness and Strategies of Fractals in Trading
They are used to identify key levels of support and resistance that provide signals for potential entries or exits. Fractals help to understand the market structure and predict its movements. They are often formed at the extremes of the market and thus mark turning points. This is especially evident in the example graph a little higher.
Although fractals offer an intuitive method of analyzing the market, they can produce delayed signals or false positives. Joint use with other indicators is therefore essential to refine trading strategies and improve prediction accuracy.
By combining them with other indicators such as moving averages, traders can filter out false signals and confirm trends.
Since moving averages give us the underlying trend of the market (bullish or bearish), we can use fractals as trading signals. For example, if a bullish fractal appears in an upward trend on the moving averages, this will often signal the end of profit-taking in the context of a bull market, where prices fall slightly from time to time before resuming their rise. In this context, we will then have a buy signal.
Conclusion
Fractals are an interesting tool for traders who want to understand and predict market movements. They require careful application and complementation with other assays to maximize their effectiveness. As with any indicator, practice and experience are the keys to integrating fractals into a coherent and successful trading strategy.
The ABC Bourse or Chart 365 charts include tools to detect fractals in the indicators. It is therefore very easy to find them without having to look at each individual candlestick.