I just noticed that many people are still confused about what the fractals indicator really is and how to use it in trading. Let's talk a bit about this quite effective tool.

Fractals are very basic — they are price patterns consisting of 5 candlesticks, where the middle candle is a peak or a trough compared to the two candles on each side. There are two types: bullish (upward) fractals, where the middle candle is lower than the surrounding candles and the last candle breaks above, and bearish (downward) fractals, where the middle candle is higher and the last candle breaks below.

What’s interesting is that the fractals indicator was developed by Bill M. Williams in 1995, but the concept dates back further. In the 1970s, mathematician Benoit Mandelbrot applied fractal theory to understand geometric numbers.

Using it is quite straightforward: after all candles close, you look for a breakout on the sixth candle. If that candle surpasses the high of the fractal, it indicates a bullish market, which could be a buy signal. Conversely, if it breaks below, it’s a bearish signal.

However, fractals are not perfect tools. They are lagging indicators, meaning signals come after the price movement. Also, they often appear frequently on charts, sometimes giving inaccurate signals. Therefore, most traders use them in conjunction with other indicators.

A popular strategy is combining fractals with the Alligator indicator, which helps confirm trends better because it consists of three moving averages. Another method is integrating Fibonacci Retracement; when a fractal aligns with a Fibonacci level, the signal becomes stronger.

An important thing to remember is to set your stop loss appropriately. In an uptrend, you can place the stop loss at the lowest point of the most recent downward fractal. In a downtrend, place it at the highest point of the most recent upward fractal.

In reality, the fractals indicator is quite effective when used in ranging markets, but it shouldn’t be used alone. Combining it with other indicators and good risk management will significantly improve results. Try using it on your charts and see how it works with your trading style.