In the trading world, one thing's for sure: prices tend to stay pretty stable most of the time. It's only during brief moments—about 15-30% of the time—that we see significant trend changes.
These lucrative moments usually happen when market prices follow a clear trend.
Enter the Fractal—one of the five indicators from Bill Williams' trading system. This nifty tool helps us spot potential tops and bottoms in the market.
So, what exactly is a Fractal? It’s a pattern formed by at least five consecutive price bars, with the highest high sitting right in the middle and two lower highs on either side. On the flip side, the reversing set consists of five consecutive bars as well, but this time with the lowest low in the center and two higher lows around it, which signals a sell fractal. Fractals are visually represented with up and down arrows, indicating high and low values respectively.
Now, here’s the catch: you need to filter these fractals using the Alligator indicator. Essentially, if a fractal appears below the Alligator’s Teeth, it’s not the right time to close a buy position. Conversely, if a fractal is above the Alligator’s Teeth, hold off on closing a sell position. Once a fractal signal is generated and sits beyond the Alligator’s Mouth, it stays in play until it's challenged by a new fractal signal.
For a deep dive into Fractals, check out the Technical Analysis: Fractals page.
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