How To Apply Fractals To Forex Trading

The dictionary definition of fractal is “A geometric pattern that is repeated at ever smaller scales to produce irregular shapes and surfaces that cannot be represented by classical geometry”.

As in Fibonacci sequences, it’s a fact in nature, art and also trading, that patterns repeat. Pick a pattern on a five-minute forex chart and you will find the same pattern repeating on higher timeframes, very often “nesting” within the same timespan on the higher timeframes.

At this stage you might be asking what is the difference between afractal and a simple price channel? The two distinguishing features I see are:

1) It’s simple enough to identify a single price channel on a chart, but once you start stacking fractals on top of one another you begin to see that price is actually fracturing or ‘fractalling’ along a trajectory, either bullish or bearish. This is far more powerful information, as it gives an indication of

• the Trend, and

• how far price, when it breaks out from a fractal, might surgebefore it withdraws back into the body of the fractal. For example, if the fractals are each averaging about 50 pips from the lower edge to the top edge, then if price surges through in either direction we could expect that it would not go much further than 50 pips to begin with. This enables us to set stops and take profits with a little more certainty.

2) Once you study the fundamental aspects behind the construction of price fractals, you see the market and its price action dynamics with far more clarity. The fundamentals of fractal price action are tied up in the order flows coming out of major financial centres: the banks and trading houses and other major players.

So how can we use this information, and how does it appear on our forex charts? The two charts below attempt to give an explanation.

After price had plunged at the left of the chart it formed a holding pattern and tracked sideways.The first example shows price in a down trend. I have identified three fractals on this chart, indicated by the horizontal white lines.

There are many fundamental reasons for this – and again I recommend Chris Lori for further information, as the subject is so broad and the detail intense that it cannot be covered in this (comparatively) short article – but what has happened is that sellers have withdrawn from the market and price  has therefore...Read more 

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