The fractal indicator is a price indicator that highlights the price pattern of an asset. It uses the candlestick chart and is plotted on five bars together, with an arrow on the third bar depicting the direction of the price.

This indicator is based on the idea that the prices that we see as random numbers are actually based on several patterns that are repetitive over time. The indicator highlights these price patterns for the traders, which helps the traders understand the entry and exit points in the market.

Using the fractal indicator in Forex makes it easy for traders to see the price turning point and it indicates the bullish and the bearish sentiments of a specific market.

As we see from the above fractals image, both price patterns indicate the up and down fractals:

• The up fractal is the third and the highest bar. There are two lower bars before it that are upwards, and two lower bars after that are moving downwards
• The down fractal is the third bar and is the lowest bar. There are two higher bars before it that are downwards, and two bars after that are moving upwards
• The up fractal is a bearish fractal, it represents the turning point where the pattern becomes a declining price trend, it is the moment for a trader to leave the market
• The down fractal is a bullish fractal, it represents the turning point where the pattern becomes an increasing price trend, it is the moment for a trader to enter the market

These indicators can be represented on the chart using arrows as well, whereas the up fractal is depicted by an arrow going up, and the down fractal is depicted by an arrow going down.

The fractal in Forex trading works as support and resistance levels, where the peak and the lowest points indicate the turning points. Traders enter the market when the price reaches the bottom low and is going to rebound for an upward trend to take over. Similarly, traders leave the market when the price has peaked at a certain point and is more likely to start declining.

The fractal indicator can be found on most trading platforms. You can find it in the indicators' menu under Bill Williams - the inventor of this indicator. Once you apply this indicator it will show on the candlestick chart. Price patterns will be depicted by arrows that are pointing up and down depending on the price movement.

One thing to take into account about the fractal Forex indicator is that the arrow that represents the fractal direction will only show after the fifth bar is formed. 

Let’s say there is a pattern being formed - if only the first four candles are drawn, you are not going to see the arrow of the fractal, only when the fifth candle is formed you will be able to see the fractal direction whether it is pointing upwards or downwards.

Therefore, you should decide on whether to enter or exit the market only when the pattern is formed, and the fractal direction is shown. Once you see the indicator you can open market orders like the following:

• If the fractal is bearish (up fractal), you should short a currency pair
• If the fractal is bullish (down fractal), you should go long on a currency pair

Using the fractal indicator to set the stop-loss

Forex trading with a fractal indicator helps you to control your risk. The patterns plotted using this indicator will help you find the right place to set your stop-loss order, which is an order that executes when you have reached the maximum loss that you can tolerate. When the market price reaches the stop-loss price, your market position will close automatically.

If you are going for a long position, looking at the bullish fractal or the down fractal, the stop-loss limit is set at the bottom of the fifth candle. 

This is the point where you expect the price to start its increase, and whenever the price drops, the stop-loss will be triggered and the market position will be automatically closed.

On the other hand, if you are going for a short position, look for an up-fractal (bearish fractal), and place the stop-loss at the top of the fifth candle.

Timeframes

Different time frames can be used alongside this indicator, which will enable traders to see the price patterns from different points of view.

Choosing a longer time frame like days or weeks will provide the bigger picture of what the general price patterns look like, and will indicate the market reversal points.

Choosing a shorter time frame like 15-minutes or a 1-hour time frame will enable you to observe the price smaller price patterns in more detail. The smaller time frame of the fractal indicator in Forex assists the trader in determining the entry and exit points in the market, as shown by the turning points of the pattern.

Traders usually apply the fractal indicator in conjunction with other indicators. It helps fine-tune the chart reading and the trend movement. Not every indicator is a good mix with the fractal, so here’s how to use the fractal indicator with some specific indicators to get a better market reading.

Fractal indicator and Fibonacci retracement

The fractal indicator and the Fibonacci retracement level complement each other very well. The fractal indicator might lack accuracy about when to trade, or after which bar a certain pattern is considered a verified turning point. 

In addition, the fractal arrow only shows when the fifth bar appears, which means the indicator will appear only later on. Some traders find it difficult to choose the right Fibonacci retracement level.

Mixing both indicators eradicates the drawbacks that each indicator faces when taken on its own. When a certain Fibonacci level indicates a turning point drawn by the fractal patterns, it is most likely going to be a turning point and a trader may enter or leave the market.

Fractal indicator and alligator indicator 

The fractal indicator and the alligator indicator were both introduced by the same inventor, which makes sense why these two indicators work so well together. Whereas the alligator indicator uses three time-frames of the moving average, it analyzes the historical price movements and gives an estimation of the projected future price movement.

When you trade using fractals and alligator indicators, you can eradicate the misleading fractals plotted in the price pattern, and visually identify the buy and sell signals.

The red line is drawn by the alligator indicator “alligator teeth” This is the determinant point that we need to compare with the fractals. It determines the buy and sell points for the trader.

• When the fractal is located above the red line, a trader may place a buy order
• When the fractal is located below the red line, a trader may place a sell order

Fractal pattern trading is useful as it shows the turning points of the market price. However, this indicator alone might not be the best tool. Let’s take a look at the advantages and drawbacks of the fractal indicator.

Advantages

• Easy to use as it visually represents the price patterns and turning points
• It helps the trader set the stop-loss point, as it functions similar to support and resistance levels
• It can illustrate the price trend, whether bullish or bearish, to help the trader enter or exit the market
• Functions as an extra filter that can be used well with other indicators for better results

Disadvantages

• It is a lagging indicator, which means that to show the fractal direction on the third bar, the fourth and the fifth bars need to be formed first. This means that it gives late signals to the trader, and in volatile markets, it can be misleading
• Using this indicator alone is not sufficient. A trader needs to mix it with another indicator(s) to get a better reading of the price

• The fractal indicator represents the price patterns, which show the turning points where traders can enter or exit the market
• The up fractal indicates a bearish trend moving downwards, while the down fractal indicates a bullish trend moving upwards
• Using the fractal indicator on different time frames is useful for different purposes: large time frames for the bigger picture, while short frames identify entry and exit points
• Investors usually trade the fractal indicator in Forex in conjunction with other indicators for better results, such as Fibonacci retracement levels and the alligator indicator