Forex Fractal Indicator Explained
- Forex fractal indicators show you the resistance and support levels on the price chart.
- Resistance fractal shows up on top of the candlestick, and support shows up below it
- Long and short setups are the best fractal indicator strategies
Fractal Indicator Forex – What Is It And How Does It Work
The Fractal is an indicator that shows support and resistance on a price chart.
The indicator is used in technical analysis to understand and analyze price movements in the financial markets. The fractals indicator in Forex uses the same logic as the Fractal indicator with stock charts.
Support and resistance levels offer useful information for any financial instrument. Traders can analyze price charts by combining trend and momentum, price patterns, and support and resistance.
How Does The Fractal Indicator Forex Show Support And Resistance Levels?
Simply said, a Fractal appears when price action makes a pivot (turn) or a simple pause in the other direction. The place where price action made the turn or pause becomes a support or resistance level.
How does price action make a pivot? A Fractal appears on the chart when price action fails to break above a candle high or candle low within a certain time limit (explained in the 3 steps later in this paragraph).
The idea is that once price action is unable to break for a higher high or lower low, then price action is running out of steam and creating a turning point (called Fractal). This turning point becomes a support and resistance level.
If price action keeps pushing for a higher high without a significant pause, then the market is in an impulse. Once the impulse is over, then the Fractal will appear to indicate the start of a potential correction or retracement.
Here is how Fractal trading Forex works:
- Resistance Fractal: a resistance Fractal appears above the candlestick if a candle high has a high that is higher than at least two candles to the left and two candles to the right. This is a minimum and there is no maximum. So more candles to the left and/or the right of it is acceptable.
- Support Fractal: a support Fractal appears below the candlestick if a candle low has a low that is lower than at least two candles to the left and two candles to the right. This is a minimum, so more candles to the left and/or the right of it is acceptable.
- The support and resistance level is not where the Fractal is shown on the chart. The actual support and resistance level is the candle low and/or candle high itself with candlesticks that have a Fractal.
Once there are two candles to the left and to the right that qualify, then the candles need to be close to confirm the Fractal. Once the candlesticks are closed, then the Fractal will always remain on the chart (and never disappear).
This logic is valid on all time frames and financial instruments. For instance, the Fractals indicator in Forex is using the same logic as Fractals in the stock market.
The Fractal indicator is a standard indicator on the MetaTrader 4 platform (MT4). Although some traders ask what is the best fractal Forex indicator, in reality, the differences are small and all Fractal indicators show the same levels.
This part discussed how the Fractal indicator Forex works. Now it is time to explain how to use the Forex fractals indicator MT4.
Fractal Breakout Indicator Forex
The main aspect to remember is simple: the Fractal indicator shows key support and resistance levels on any price chart and any time frame.
These support and resistance levels can be used as all other support and resistance indicators: for breakouts, bounces, targets, stop losses, and entries.
Using Fractal Indicator Forex For Breakouts And Bounces
The Fractal indicator is most known as a breakout indicator. When you look at Fractals trading in for instance Forex Factory, you will notice that most are using the Fractal for breakouts.
These Fractal levels are used as support and resistance levels. A breakout takes place once price action breaks above the resistance of the Fractal or below the support of the Fractal.
The Fractal indicator can also be used as a bounce indicator. Once price action fails to break above the resistance or below the support, a reversal or bounce could take place.
It is important to analyze whether a breakout or bounce is expected. Traders can use other tools and indicators to complete their analysis. Or they can use a trading strategy to improve their trading decisions.
The Fractal indicator itself will not inform traders whether price action will break or bounce, it will only show the support and resistance levels themselves. Most traders use the Fractal indicator for trading with the trend or a reversal (but only if there is a very chance that a reversal will occur).
Using Forex Fractal Indicator For Targets And Stop Losses
A Fractal indicator is support and/or resistance level. These levels are therefore quite useful for placing a stop loss:
- With long setups: traders can place the stop loss below the support Fractal.
- With short setups: traders can place the stop loss above the resistance Fractal.
The Fractal indicator can also be used as a target:
- With long setups: traders can aim at the Fractal resistance on higher time frames.
- With short setups: traders can aim at the Fractal support on higher time frames.
Fractal Indicator Strategy – What’s The Best One?
The main Fractal indicator strategy is based on entries based on a breakout:
- Long setups: a pending order above the resistance Fractal.
- Short setups: a pending order below the support Fractal.
Usually, traders add a small “buffer” above or below the support and resistance level. This way, they sometimes avoid false breakouts that break the support and resistance level by a small margin.
Traders can also use a market order for trading the breakouts rather than pending orders. The market order is useful especially if traders are unsure whether the breakout will succeed or fail:
- Long setups: wait for a candlestick close above the resistance Fractal before entering with a market order.
- Short setups: wait for a candlestick close below the support Fractal before entering with a market order.
What Did We Learn From This Fractal Indicator Guide?
This article explained first of all how the Fractal indicator works. The Fractal indicator appears when price action has made a pivot into the opposite direction. This occurs when price action has two higher lows on the left and right or two lower highs on the left and right. Once a pivot has been made, a Fractal appears on the chart. This represents a support or resistance level. Then this article discussed how the Fractal indicator can be used for Fractal trading Forex breakouts and bounces and for placing stop losses and targets.
Detailed Info On Fractal Indicators
How Does A Fractal Indicator Work?
A Fractal appears when price action makes a pivot into the other direction. The place where price action turns becomes a support or resistance level. Why? Because at the price level, the support and resistance were so strong that the trend changed. Therefore, this candle high or low receives a Fractal to indicate that the support and/or resistance level is strong. In case of bullish price action, candlesticks are making higher highs and as soon as 2 candles to the right and left have lower highs, a Fractal appears above that candle high. In case of bearish price action, candlesticks are making lower lows and as soon as 2 candles to the right and left have higher lows, a Fractal appears below that candle low. This is how the Fractal indicator works. Once a Fractal is visible, then the candle high and/or low that has a Fractal works as a support and/or resistance level.
How Do You Trade A Fractal Strategy?
The Fractal indicator can be part of Forex trading strategy. The indicator can be used in various roles within a Fractal trading Forex plan. The most commonly known way to use Fractals is by entering a trade setup via a breakout. As price action breaks through the Fractal support or resistance, traders can place a pending order above resistance or below support to trade the break. But keep in mind that the Fractal is almost always part of a larger trading strategy. Traders can also use the Fractal for trading reversals, placing a stop loss, and adding targets. Finally, traders, the Fractal is also sometimes used for filtering out traders, or in other words, skipping trade setups if their entry is too close to a Fractal.