I hear the word FRACTAL thrown around by many traders...It would make one think that this is the first trading jargon that traders especially newbies come accross. Sometimes i dont know if what they think the word means is actually what it means...so here is a brief definition.
FRACTAL: These basic fractals are composed of five or more bars. The rules for identifying fractals are as follows:
- A bearish turning point occurs when there is a pattern with the highest high in the middle and two lower highs on each side.
- A bullish turning point occurs when there is a pattern with the lowest low in the middle and two higher lows on each side.
The fractals shown in Figure 1 are two examples of perfect patterns. Note that many other less perfect patterns can occur, but the basic pattern should remain intact for the fractal to be valid.
The obvious drawback here is that fractals are lagging indicator– that is, a fractal can't be drawn until we are two days into the reversal. While this may be true, most significant reversals last many more bars, so most of the trend will remain intact.
Like many trading Indicators fractals are best used in conjunction with other indicators or forms of analysis.
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