There are a number of different FOREX trading strategies on the market today. As one might expect, some of them are more effective than others. One strategy that has developed a significant following, especially with the larger accounts and so-called smart money is Fractal Trading. Though this at first appears to be an incredibly complex strategy that would require a degree in finance or investing to properly grasp, in reality it is not impossible to understand if it is well explained.
What Is A Fractal?
Fractals in forex are different than in abstract math. In the world of foreign exchange, these relate to a specific region of consolidation and price channeling which are present on a given currency pair. Their power is made more potent by the reality that many forex traders are closely watching these fractal regions, making them in part a self-fulfilling prophecy. The borders of the channels involved are well-known and noted. Big money in the forex markets keeps a close watch on them and utilizes them as resistances and supports in order to place large trades on various currency pairs.
Repetition of Patterns and Fractals
The application of repeating patterns is not unique or original to fractals. People have discovered the fact that patterns tend to repeat themselves, whether in art, nature, Fibonacci sequences, or trading in general. Traders can even see this bear out by looking first at forex charts on a five minute time frame. The pattern seen here will be repeated on larger timeframes, often times nesting in the identical frequency on the timeframes that are greater. This is the whole basis of fractals, that these patterns which present themselves are sure to repeat again.
Main Distinguishing Traits Between Fractals and Price Channels
It would be easy for the casual observer to wonder what the difference between fractals and price channels is. At first glance, they do appear to be the same. Two features set them apart from one another:
Fractals Occur Along Trend Lines
1. Anyone can identify easily enough one instance of a price channel by looking at the charts. With fractals, they actually stack on top of each other to present a result of prices that are literally fracturing along a trajectory line that is a bearish or bullish one. What makes it such potent information is that it indicates a running trend along with an indication for how far prices could surge when they break free from a fractal before they pull back within the boundaries of the fractal. So if fractals are maintaining an average of around 75 pips from the bottom boundary to the top boundary, then price movements either up or down should not rise or fall much more than 75 pips at least initially. Because of this, traders are able to place profit and stop loss orders with some degree of certainty.
Fractals Provide Comprehension
2. Understanding clearly the fundamental components and characteristics of price fractals allows traders to view the market and its accompanying price dynamics with vastly more confidence and comprehension. These fundamentals are linked with the principle financial centers flows of orders that come down from the trading houses, major firms, and forex-trading banks.
Why Fractals Work So Well
When fractals form along a trend line, the orders emitting from the big money in the forex markets aligns with the price bandwidth. The smart money happily trades away any currency pair that falls within these fractal levels using the bottom and top of the fractal itself as entry and exit points. They will do this like a clock until they see fundamental elements outside the technical levels of the fractal interfere, as in the form of breaking news relevant to one of the currencies in the pair. This could then force the price to jump without the fractal’s present limits.
Two Primary Fractal Trading Strategies
Two principal fractal trading strategies exist. These are the Retest and the Slip Through methods. These can be understood as:
• Retest – Traders patiently wait for the price to surge on past one of the boundaries of the fractal, then watch for it to retest this border it recently blew past. This trade looks to see if it will reject from the level according to the direction it found as it moved past the fractal. Stops would be set on the fractal’s other side, past the farthest away boundary of the fractal.
• Slip Through – This strategy requires traders to watch and wait for a candle that is blunt-ended to close past the present fractal’s boundary. The buy or sell order would be put in as a limit just ahead of the price, and stops would lie on the other side of the fractal’s boundary. Such a stop covers the whole width of the fractal itself, as it should.
Prospective traders who are ready to learn more about and try out the Fractal Trading strategy should contact AlfaTrade. AlfaTrade is an online trading company and platform that provides a variety of forex trading tools. Sign up for an account with them today to learn more about this forex strategy and others.