How to read and use Williams Fractal

trading indicator
By Zoran Temelkov
23:41, 16 January 2020

What is Williams Fractal trading indicator?

Williams fractal or fractals is a technical analysis indicator introduced by the famous
trader Bill Williams in his book "Trading Chaos". He developed it on the basis of the
chaos theory and trading psychology. The indicator is centred around the idea that
there is repetition in price behaviour and fractals can provide an insight into the
repetition patterns.

The indicator usually looks like a five bars model which is aimed to identify possible
reversal points and detect the direction of the price.

In order to detect a fractal formation look at five successive price bars where the
third (or the middle) bar represents the highest high or the lowest low.

Keep in mind that the fractal trading indicator arrow appears only above or below the
third candlestick if it is the highest or the lowest of the five bars. Also, according to
Williams, you don't have to incorporate five bars to create a fractal.

On your trading platform, the Williams Fractal trading indicator is displayed as arrows
located immediately above or below the price bars on your chart.

The arrow above the candlestick is called buy fractal and the arrow below the

candlestick is called sell arrow.

The first one is called a buy arrow because it serves as resistance, meaning that
when the price moves beyond this level a buy signals will occur.

The sell fractal acts as a support level and price moving below this fractal can
indicate potential sell opportunity. Noteworthy is that the fractal indicator can provide
more reliable alerts on higher time frames, but it will also display fewer signals.

How to use fractals in trading

Although some consider the fractal trading indicator as being outdated for today's
markets, it is still heavily used by traders. The indicator is a handy tool for defining
your trading strategy and it can be utilised as follows:

 For detection of potential stop-loss levels;

 They can act as a support and resistance levels;

  To determine the highs and lows;

 Signal potential entry points;

 To be applied together with Fibonacci retracement levels.

Before we take a closer look at them, let’s make one important aspect clear. The
naming of the up and down fractals may be a bit confusing for traders. The reason is
that the down fractal is referred to as bullish and the up fractal is called bearish.

Look at the example of bearish and bullish fractal in the next image. A bearish fractal
is formed when the middle price bar displays the highest high compared to the two
bars to the left and right, which have lower highs.

It is called a bearish fractal because although the fractal points up, it is followed with
a price decline. The bullish fractal, on the other hand, is detected when the middle
bar has the lowest low compared to the bars on both sides.

You should generally be looking for a nearly perfect fractals structure (similar as the
ones presented above) because the fractals can appear in different formations with
different lengths of the bars on either side. The fractal structure can also depend on
the underlying asset.

Now, coming back to the question of the fractals application. One option is to
determine potential stop-loss levels. You will set your stop loss level when entering
a short position at the top of your last fractal. On the contrary, a stop loss for a long
position will be set at the bottom of the last fractal.

Also, the Williams fractal trading strategy can include the Fibonacci retracement
levels. Applying the fractals will enable you to reject potential levels which may
prove to be misleading in a way that you will execute a trade solely at the levels
where the fractal reversal appears.

You can use fractals to determine potential breakouts by looking at the position of

the current fractal compared to the previous fractal. Bill Williams states that when the
price moves one point or more, above or below the previous fractal, is signals
potential breakout.

 A buy breakout appears when the price increases above the last

upward fractal
 A sell breakout occurs, if the price moves below the last downward

fractal.

Williams alligator, another trading indicator, can help you clear out the signals
detected with the fractals. Traders include it as part of their Williams fractal trading
strategy and look for buy and sell signals based on the position of the fractals in
relation to a specific alligator line. Here is how it works:

 Place a buy order when the buy fractal is above the red line (the

alligator's teeth)
 Place a sell order when the sell fractal is detected below the

alligator's teeth.

As you can see the Williams fractal trading indicator can be applied in several ways.
However, the way you use it depends exclusively on your personal preferences and
trading strategies. Don’t forget to use the fractal trading indicator in combination with
other tools. You can also consider to set up fractals with different time frames and
look for opportunities generated from shorter time frames while the longer time frame
fractals will act as a filter of the shorter frame signals.

Advantages of fractal trading indicator

 Once the trader grasps the notion behind fractal trading indicator it is

rather simple to use and to identify potential trading signals and other

types of alerts;
 Except for the highs and lows, fractals indicator also shows potential

support and resistance levels of buy and sell positions;

 You can use fractals as an additional indicator when determining the

trends;
 Identification of potential breakouts;
Drawbacks of Williams fractal indicator

 The fractal indicator will lag by a couple of bars because at least two

closed bars are needed for a fractal to be completed, meaning that

when it provides a signal, the price may be at another level compared

to the signal;
 Fractals trading is recommended during the trending market, but you

should avoid using the indicator during a sideways moving market;

 Traders should pay close attention to the fractals formation as some

of them may provide misleading signals.