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Trading The Forex Fractal

The concept of The Forex Fractal is more than
just a strategy idea. It is a way of
understanding forex price action and trade
ows at their most fundamental level.
The fractal as used here refers to areas of price
channelling and consolidation that are being
watched by large numbers of forex traders.
More importantly, the boundaries of those
channels are being watched by the Big Guns in
the market, thus forming levels of support and
resistance.
The dictionary denition of fractal is A
geometric pattern that is repeated at ever
smaller scales to produce irregular shapes and
surfaces that cannot be represented by classical
geometry.

A geometric pattern that is repeated at ever

smaller scales to produce irregular shapes

and surfaces that cannot be represented by

As in Fibonacci sequences, its a fact in nature,

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classical geometry
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art and also trading, that patterns repeat. Pick a

pattern on a ve-minute forex chart and you will nd the same pattern repeating on higher
timeframes, very often nesting within the sametimespan on the higher timeframes.
At this stage you might be asking what is the dierence between a fractal and a simple
price channel? The two distinguishing featuresI seeare:
1) Its simple enough to identify a single price channel on a chart, but once you start stacking

fractals on top of one another you begin to see that price is actually fracturing or fractalling
along a trajectory, either bullish or bearish. This is far more powerful information, as it gives
an indication of
the Trend, and
how far price, when it breaks out from a fractal, might surge before it withdraws back
into the body of the fractal. For example, if the fractals are each averaging about 50
pips from the lower edge to the top edge, then if price surges through in either
direction we could expect that it would not go much further than 50 pips to begin with.
This enables us to set stops and take prots with a little more certainty.
2) Once you study the fundamental aspects behind the construction of price fractals, you

see the market and its price action dynamics with far more clarity. The fundamentals of
fractal price action are tied up in the order ows coming out of major nancial centres: the
banks and trading houses and other major players.
So how can we use this information, and how does it appear on our forex charts? The two
charts below attempt to give an explanation.
The rst example shows price in a down
trend. I have identied three fractals on
this chart, indicated by the horizontal
white lines.
After price had plunged at the left of the
chart it formed a holding pattern and
tracked sideways.

Forex Fractal Trading: Fractals in Downtrend

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There are many fundamental reasons

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for this, but basically, what has

happened is that sellers have withdrawn from the market and price has therefore
stabilised.
After this rst fractal formed price slipped through at the end of the session, indicated by the
vertical dotted line. This is quite common price behaviour at session change-over times:
traders exiting the market settle up their positions, which in this case has resulted in more
longs withdrawing and a resulting drop in price.
A small gap down followed at the start of the new session and price found a new level of
support at the third white line drawn.
Note the resistance formed by the underneath of the previous fractal. This old area of
support now signies an area where sellers are lined up, and as price approaches that area
it twice rejects, see the two white circles in the middle of the chart. Depending on all the
other usual factors that you should take into account in your trading (time of day, conuence
etc.) either of these rejections represented a possible short entry.
The nal circle at the right shows where price has come back and pierced the second
fractal, but not managed to stay within it. The underneath of the second fractal now
becomes the area of resistance where traders are prepared to enter with short orders. Their
order ows concentrate around the boundaries of this fractal and the new one now forming.

Essentially, what happens as fractals form in a trend is that the order ows created by major
market players adjust to a new bandwidth or price extent. The big traders, for one reason or
another, will be trading the currency pair between those two levels represented by the top
and bottom of the fractal, until external factors such as breaking news cause price to move
beyond the limits of the current fractal.
The second chart shows price forming fractals in an uptrend.
By now I hope you can see how easy it is to draw in the lines representing the upper and
lower boundaries of a fractal.
You dont have to do this physically on your charts of course; in time it just becomes
automatic for you to see these levels and to note them.
The rst circle marks where price after breaking out of the rst fractal (and, interestingly,
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surging a distance roughly equal to the

bandwidth of the previous fractal, plus
just a little more) retraces and rejects
from the upper level of the fractal it just
broke out of.
The last two circles shows similar retests
as price moves into an increasingly
bullish trend. As the move upwards gains
Forex Fractal Trading: Fractals in Uptrend

momentum the bandwidth of each

successive fractal extends a little.

There are two main ways to trade the fractal: the Slip Through and the Retest. Briey, the
details of these two approaches are:
For the Slip Through, wait for a strong, preferably blunt-ended candle to close beyond
the boundary of the current fractal. Place a limit order just in front of price, with a stop
just behind the other boundary of the fractal. This gives you a stoploss of the width of
the fractal, and that is usually a good place for your stop to go.
For the Retest, wait until price surges beyond a fractal boundary (in other words, a Slip
Through) and returns to retest the fractal boundary it just broke beyond. Ensure that it
rejects from this level in the direction that it took when it surged beyond the fractal.
Once more, place your stop on the other side of the fractal, i.e. beyond the furthest
fractal boundary.
As always in every strategy, be sure to incorporate other signals and information into your
trading decisions. Trading the boundaries of the fractal is the core of the strategy only.
A few last notes:

I have left discussion of the forex fractal to be the nal of the 10 forex strategies
presented in this section of AuthenticFX. There were several reasons for this, not the
least being the fact that the fractal is a dicult concept, on some levels, to teach. If I

have left anything poorly explained, or if you would like more details, please leave
questions and/or feedback below. The dynamics of forex fractals are fundamental
to the way I trade, so Id love to hear your thoughts on this!

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Also, if youve read through the other nine strategies you maybe now can see that the
power of each individual strategy comes from its ability to be combined with some or
all of the others into a comprehensive suite of strategies to be traded within a forex
system.
Trading fractals is something I continue to nd fascinating and rewarding. If you apply
yourself to studying it, I guarantee positive results will show in your trading!

Comments

Tom says
DECEMBER 15, 2014 AT 3:01 PM

Excellent article. I have mastered this technique with my trading method. I would like to
add that there are 10 and 20 wave cycles within each phase of the fractal setup that I
use. I really never took note that there are on average just 10 candles between the up
and down or down and up fractals 2 up fractals and 2 down fractals in a phase. At least
this is the way I have interpreted it from my research.
Bill Williams stated the denition of a Fractal is really just a behavioral change in the
market . I use the Market Facilitation Index Indicator to tell me what the market is doing,
mostly when the institutions are buying and selling. My play is o the Fade bar and a
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