Price Action moves in waves. By adding the Bill Williams Fractal Indicator the peaks and troughs are easier to see. Take a look at the examples on the right. Second image is with fractals indicator added. The fractals indicator is part of MT4 ...
Insert -> Indicators -> Bill Williams -> Fractals
Fractals are useful for many trading strategies. One of our favorites is the 'fractal breakout strategy'. The fractal breakout strategy views fractals on multiple time frames as support and resistance. The pipware dashboard provides useful fractal information as well as fractal support and resistance.
Looking at the example to the right, one can determine the vertical distance between adjacent upper and lower fractals. On any time frame, an average distance can be calculated.
Let's take GBPUSD on M15 as an example. Good trading opportunities typically have 30-60 pips between the high and low of a swing. Beyond 60 pips is possible but unlikely except during major news events like Non Farm Payroll etc. Knowing these average distances is useful for profit exectations (profit targets).
Let's look at a trading opportunity I see on GU M15 right now (as I write this). I can see a 1 -2 -3 pattern. A typical entry is the current situation ie price has broken below point 2 (green line). A stop would be placed above point 3. Let's use what we learned (above) to determine whether to take this trade.
I've shown a portion of the dashboard panel (above). It always gives information about the last two fractals. I also show the last two fractals on the chart (right). Because we are on M15, I have drawn lines for 0, 30 and 60 pips in the trading direction from the relevant fractal.
The dashboard fractal information FRAC 14 10 24 can be understood as follows. The left-most value (14) is the vertical distance (pips) between the last two fractals ie the height of the previous swing. The other two values are how far (pips) the current chart price is from these two fractals. The middle value (10) is the number of pips to the low fractal. The right-most value (24) is the number of pips to the high fractal.
There is a very high probability that the next low fractal will appear between the 30 line and the 60 line. Knowing that the stop will be 30 pips (point 3), this is NOT a very good trading opportunity. The risk is too high for the likely reward. To the right is what actually happened ... the loss would have been greater than 30 pips!
A typical pipware.com entry would be the 3rd candle back ie the break of the low fractal with a 10 pip stop. You would have made 10-15 pips (dependent on spread) with the possibility of more if price continued further below the green line ie the likely profit potential would have been 10-40 pips.
Fractal Support and Resistance
The idea behind this is very simple. Every point that price turns (swing high or low) is a point of support and resistance. Since fractals show highs and lows, fractals occur at support and resistance. By setting DotsOn=true you can see this on any timeframe. The example (right) is GU M15.
At pipware.com, we have taken this idea further. We already knew that the last two fractals are the most important. It was a simple step to create support and resistance lines from fractals on multiple time frames.
To understand this, let's look at a single time frame M15. Settings are shown left. The example (right) shows two blue lines drawn at the high and low formed by the last two fractals. You can already see that price has since bounced off the high line ie resistance. There is a reason why the bottom line is thicker than the top line. This is covered in the fractal breakout discussion (below).
Fractal support and resistance becomes even more useful when we add other timeframes.
Let's add H4 to the SRLinesTF setting (above). Viewing the H1 chart we get the example on the right.
The blue lines are drawn automatically for us by the dashboard indicator. If you were to hover your mouse over each line, a label appears showing which time frame the line was generated from.
You can add as many timeframes to the SRLinesTF setting as you like. SR lines are automatically drawn for all time frames entered.
Fractal Breakout Strategy
As stated earlier, price action moves in waves. Trend direction (up or down) is determined by the consecutive highs and lows.
UP TREND is when these waves are making higher highs and higher lows.
DOWN TREND is when these waves are making lower lows and lower highs.
Because fractals are highs and lows, they can be used to determine trend direction.
Consider the GU H4 chart (right). Prior to point A the trend is upward ie the second low fractal is higher than the first .. the second high fractal is higher than the first.
A new low fractal formed at point A and is higher than the previous two low fractals (continuing the UP trend). The candle immediately after point A formed a new high fractal. This fractal is lower than it's previous high fractal indicating a possible change in trend direction. The candle under point B 'breaks' the fractal level of point A (green line). A red arrow is drawn indicating that the trend direction has changed to DOWN.
Arrows can be displayed by ArrowsOn=true. Note: arrows are drawn only when a fractal break changes trend direction. For example, after point B, the lower fractals continue to be broken (2 more times).
After point B, the trend is considered DOWN until a high fractal gets broken. Just prior to point C, a higher low fractal is formed. The trend direction is still considered DOWN ... no high fractal has been broken yet.
At point E, the high fractal of point C is broken. Even though it is a small break a green arrow is drawn at point D indicating a change in trend direction. The trend is now considered to be UP until the next low fractal break.
Note the two blue fractal support (H) and resistance (G) lines. As explained above, they are drawn from the most recent high (E) and low (F) fractals. Based on the high fractal break at point E (green arrow at point D), the trend is currently considered to be UP. Note that the resistance line G is thinner than the support line H. This is based on current UP trend direction ie support is strong (thick line) while resistance is weak (thin line). The thicker line also indicates where price needs to break to change trend direction.
Up until now, we have only discussed breaks on a single time frame (GU H4). Because these breaks occur on all time frames, we made a summary available on the dashboard panel (image left). How is this interpreted?
The Dir column shows the current direction on the time frames listed. Bars is the number of bars since the last change in direction ie how many bars back the arrow is. Pips is the number of pips the current price is from the thick line ie a change in direction. In this example (left), the larger time frames are in an up trend while the lower time frames are in a down trend. M5 and M15 have changed direction on the current candle. Why is this useful? Our trading style is to trade with the trend. The example is telling us to trade long and a pull-back is occuring on the lower timeframes. A good entry would be M1 changing back to an uptrend.
This summary panel is turned on by DashRowsOn=true. The blue highlights are turned on by HighlightOn=true. The highlight appears when a fractal break has occurred on the current candle.
The time frames to display are set in RowsTF.
As with most summary panel sections, the colums can be individually turned on/off, have headings changed and widths changed. Setting a width to 0 causes the default values to be used.