Ever hear the old saying in trading that goes “markets don’t repeat, but they often ryhme?”, well that’s kind of a great short explanation of a fractal.
But what exactly is a fractal?
Fractals (sometimes called analogues) are historical chart patterns that repeat themselves. When a trader uses a fractal, he’s essential saying that a recent move (or market) is copying or imitating another asset, or move that has occured in the past.
Fractals Between Markets
On the below two charts, we see silver (top) and bitcoin (bottom). These charts imply that the BTC market is “copying” silver, and while the markets are obviously unrelated, there is no denying the scary similarities between the two.
A historical chart of silver (top image) againt Bitcoin (bottom image) – see any similarities?
Fractals Between Related Assets
Below we can see the similarities in Pascalcoin, SNT, LBC and ABY altcoins in 2018. Due to Bitcoin dominating the market, we will often see coins replicate eachother as bitcoin makes a move to the up or downside, however it’s easy to how these chart fractals occur.
Altcoin Fractal (PASC, SNT, LBC & ABY)
Fractals Patterns on the Same Asset
But why do they occur?..
Market psychology.
As put briliantly in this guide from Kazonomics and as he states ” Price is nothing more than consensus behavior of human emotions over time. It is a very powerful concept when applied correctly but equally damaging if used incorrectly…”
Is there such a thing as a fractal indicator?
While it’s not going to predict the future, there is a “type” of fractal trading system that was developed by Bill Williams, called the… Bill William’s Fractal.
This general system is formed around a group of five consecutive trading candles. In the video below we try it out and discuss whether this is indicator is worth adding to your trading tool belt… or not.
- A bearish turning point occurs when there is a pattern with the highest high in the middle and two lower highs on eachside.
- A bullish turning point occurs when there is a pattern with the lowest low in the middle and two higher lows on each side.
Note: It’s important to note that fractal-based indicators are lagging indicators
Trading Using Fractals
A fractal can’t be drawn until we are two bars into the reversal. However, most significant reversals will continue for more bars, and once the pattern occurs, the price is expected to rise following a bullish fractal, or fall following a bearish fractal.
The first two bars are successively moving higher and the last two are descending lower. The middle bar is the highest (or lowest) in the group.
Bearish reversals are indicated by an upward pointing arrow, while bullish reversals are indicated by a downward pointing arrow when using the “Williams Indicator”.
The Alligator Indicator
Trader Bill Williams, an early pioneer of market psychology, developed a number of original technical indicators in a career that spanned more than five decades. His trend-following Alligator indicator follows the premise that financial markets and individual securities trend just 15% to 30% of the time while grinding through sideways ranges the other 70% to 85% of the time.
Williams believed that individuals and institutions tend to collect most of their profits during strongly trending periods. Williams invoked barnyard imagery to describe the indicator, noting “even a blind chicken will find its corn if it is always fed at the same time … it took us years but we have produced an indicator that lets us always keep our powder dry until we reach the blind chicken’s market.”
Parts of the Alligator Indicator
The Alligator indicator uses three smoothed moving averages, set at five, eight and 13 periods, which are all Fibonacci numbers. The initial smoothed average is calculated with a simple moving average (SMA), adding additional smoothed averages that slow down indicator turns.
- Jaw (blue line) – starts with the 13-bar SMMA and is smoothed by eight bars on subsequent values.
- Teeth (red line) – start with the eight-bar SMMA and is smoothed by five bars on subsequent values.
- Lips (green line) – start with the five-bar SMMA and smoothed by three bars on subsequent values.
Standard Alligator Settings
How it Gives You Signals
The indicator applies convergence-divergence relationships to build trading signals, with the Jaw making the slowest turns and the Lips making the fastest turns. The Lips crossing down through the other lines signals a short sale opportunity while crossing upward signals a buying opportunity. Williams refers to the downward cross as the alligator sleeping and the upward cross as the alligator awakening.
The three lines stretched apart and moving higher or lower denote trending periods in which long or short positions should be maintained and managed. This is referred to as the alligator eating with mouth wide open. Indicator lines converging into narrow bands and shifting toward a horizontal direction denote periods in which the trend may be coming to an end, signaling the need for profit-taking and position realignment. This indicates the alligator is sated.
The indicator will flash false positives when the three lines are crisscrossing each other repeatedly, due to choppy market conditions. According to Williams, the alligator is sleeping at this time. Remain on the sidelines until it wakes up again.
This exposes a significant drawback of the indicator because many awakening signals within large ranges will fail, triggering whipsaws.
Final Thoughts
When used, it provides a useful visual tool for trend recognition and trade entry timing, but it has limited usefulness during choppy and trendless periods. Traders can confirm buy or sell signals with a moving average convergence divergence (MACD) or another trend identification indicator.
* 2021 Unity Trading Group PTY LTD. The information on this website has been created by Unity Trading Group (ABN: 630163343) for general information and educational purposes only and is not to be constructed as personal or financial advice. All forms of trading carry a high level of risk, and may not be suitable for all investors. Before deciding to trade any market reported on by Unity Trading Group you should carefully consider your objectives, financial situation, needs, and level of experience. By trading, you could sustain a loss in excess of your deposited funds. Before trading ASX/FX/Cryptocurrency markets you should be aware of all the risks associated with trading. Unity Trading Group recommends you seek advice from a separate financial advisor before making any decisions based on the general information given on this website or affiliated platforms.