Thursday, 1 December 2011

Fractal Breakouts: Using Fractal Channels and Fractal Dimensions

This is a cool idea, but it has its flaws. The problem that we all know about fractals is that it displays the direction of the price action just a little too late (3 bars or more too late). The fractals do, however, provide good support and resistance levels. So, the idea is to wait for the price to exceed the fractal support/resistance line, and then enter your trade.

I found a couple indicators that can make this a little easier (all found on Forex-TSD):
FractalChannel (red and blue lines on chart)
FractalChannelh (histogram with red and blue bar on the bottom)
FractalMD_v1 (red and blue dots on the chart) (would need a subscription to Forex-TSD to get this indicator)

On the chart above the indicator FractalChannelh displays bars when the price exceeds the fractal support/resistance levels (show by the red and blue lines produced by the indicator FractalChannel). First off, the problem with this indicator is that it does not know when to stop displaying coloured bars until the next fractal point comes up, which will be 2 to 3 bars in the future. So you can not use this indicator by itself. Secondly, you also have to wait until the bar closes, because a lot of the time you have the price move pass the fractal point, only to reverse and have the bar close below the fractal point. Because of these problems I like to keep the FractalChannel indicator on my chart, just so I can see for myself why or why not the histogram bars are displayed.

To solve the problem of waiting for the next fractal to show up and give you your exit point, I would use the indicator FractalMD_v1 (Multiple Dimension Fractals) to determine my exit point. I found that it displays the dots right at the close of current bar it believes to be the top/bottom. This seems like a perfect fractal indicator, but unfortunately the FractalMD_v1 indicator does repaint itself. Even though it repaints we can still use it for an exit. It may display the dot a little early, but at least you would walk away with some profit points or a small loss.

  • Enter when price bar closes above/below FractalChannel lines, and FractalChannelh displays the corresponding colour bar
  • Exit when FractalMD_v1 displays a colour dot