Fractals¶

Definition¶

The Fractals indicator is a technical analysis tool that identifies potential turning points or reversal patterns in a market by highlighting local highs and lows (called fractals) over a specified period. It helps traders spot patterns in price action that signal shifts in market direction, such as tops (up fractals) and bottoms (down fractals).

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History¶

The Fractals indicator was developed by Bill Williams, a well-known trader and author who introduced the indicator in his book "Trading Chaos", published in 1995. The concept of fractals stems from fractal geometry, which is used to analyse repeating patterns in nature. Williams applied this concept to financial markets to create an indicator that identifies key points where market reversals may occur.

Calculations¶

\(Up\) \(Fractal\) – the middle price in the given period must be higher than the prices on both sides of it. If this condition is met, the middle price is marked as an up fractal.

\[ Middle\ Price\ at\ i > High\ at\ (i−1),\ (i+1),\ (i−2),\ (i+2),\ …,\ (i−(n−1)),\ (i+(n−1)) \]

\(Down\) \(Fractal\) – the middle price in the given period must be lower than the prices on both sides of it. If this condition is met, the middle price is marked as a down fractal.

\[ Middle\ Price\ at\ i < Low\ at\ (i−1),\ (i+1),\ (i−2),\ (i+2),\ …,\ (i−(n−1)),\ (i+(n−1)) \]

\(n\) – the number of periods (usually odd)

\(i\) – the index or the individual period

Interpretation¶

• Up Fractals – an up fractal appears when the price has reached a local high. Traders may use this as a potential sell signal or to identify resistance levels in the market.

• Down Fractals – a down fractal forms when the price hits a local low, potentially signalling a buy opportunity or highlighting support levels.

• Shift – by adjusting the shift parameter to alter the alignment of the Fractals with price data on the chart, you can explore how the indicator readings correspond to past or future price movements.

Application¶

• Buy signal – traders might consider buying when a down fractal is identified, suggesting a potential reversal to the upside.

• Sell signal – an up fractal can signal a potential reversal to the downside, giving traders an opportunity to sell or exit long positions.

• Trend confirmation – the Fractals can be used to confirm trends, particularly when combined with other indicators like moving averages to filter out noise and false signals.

• Combining with other indicators – traders are often advised to combine the Fractals with other indicators such as the Alligator, moving averages and the Bollinger Bands for improved accuracy.

Limitations¶

Fractals may generate lagging signals because it relies on historical price data to identify patterns. This lag may lead to delayed signals in fast-moving or volatile markets. In addition, it can produce false signals during periods of low volatility or sideways markets, where the price fluctuates without clear trends.

Summary¶

The Fractals indicator helps traders identify potential market reversals by marking local highs and lows. Developed by Bill Williams, it is widely used to spot key turning points and confirm trends. Williams derived the concept of fractals from fractal geometry, which is used to analyse repeating patterns in nature. The Fractals indicator identifies up fractals and down fractals by comparing the current bar's high or low to the highs or lows of surrounding bars within a specified period.