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How can I use the Williams fractals in forex trading?

How can I use the Williams fractals in forex trading?
Asked by
Walter Peters time-icon1 month ago
1 Answer Answer Question

Tom Blackstone
Answered time-icon1 month ago

The Williams fractals were developed by Bill Williams as a method to make sense of the chaotic price movements that are witnessed across different asset classes. Williams believed that even though price movements within the financial markets are quite random, the random movements tend to form repeating patterns that can be used to find potential trade entries.

A fractal is typically made up of five bars that occur in a specific manner:

  • A bearish fractal is formed when a price pattern occurs with the middle bar being the highest and the two bars on each side being lower.
  • A bullish fractal typically appears when a price pattern occurs with the middle bar being the lowest and the two bars on either side being higher.

Chart 1: Examples of a bearish and bullish fractal

 

How to use Bill Williams' fractals

The above patterns appear quite easy to identify in most charts because they are very straightforward, as portrayed above. However, experienced traders know that nothing in the markets shows up in the exact same way as they do in trading manuals.

You might also be wondering whether you should open your charting software and start looking for these fractal patterns in order to find potential trade entry setups. Most charting software includes the Williams’ fractals within their charts, and all you have to do is to apply the indicator to whatever chart you are analysing.

Chart 2: USD/CAD daily chart with Williams’ fractals indicator

As you can see from the above chart, Williams fractals appear frequently on the charts and can generate many false signals that you should avoid, while a few signals are worth trading. The problem gets worse on the lower time frame charts in volatile trends where the huge number of fractals present can lead to confusion.

To solve this problem, it is prudent to combine the Williams fractals with another indicator, such as the Williams alligator, to confirm the high-probability trade signals and eliminate most of the false signals.

Chart 3: USD/CAD daily chart with both Williams fractals and alligator

The Williams alligator is a great complement to the fractals because both were created by Bill Williams based on the same underlying logic of trading the chaos that exists in the financial markets.

Once you’ve added the Williams alligator to the chart, you can focus on taking long trades generated by bullish fractals whenever the price is above the middle (red) alligator line, also known as the alligator teeth. You can basically ignore all bullish signals generated when the price is trading below the alligator teeth, which makes trading the Williams fractals much simpler.

The opposite is true for short trade signals generated by bearish fractals as you would only trade short signals that occur when the currency pair’s price is trading below the middle (red) alligator line (the alligator teeth).

Chart 3: Trade signals generated by the Williams fractals and alligator

As you can see in the chart above, by only taking long trades when the price is above the alligator teeth, you would have missed some moves but would have taken some trades with significant profit potential.

The same is true for taking short trades when the price is below the alligator teeth. You would have gotten into some moves quite late and missed out on some profits, but you would have avoided many false trade signals.

 

Considerations when trading the Williams fractals

  • Be careful not to trade every single signal as the fractals appear all the time, generating many false signals.
  • You should combine the Williams fractals with other indicators, such as the alligator or the Fibonacci tool, to improve the accuracy of trade signals.
  • Remember that the Williams fractals only provide trade entry signals, and it is up to you to use proper risk management to protect your trading account.

 

The bottom line

Many people believe that Williams fractals are an outdated indicator that does not apply to today’s markets and may dismiss them at face value. However, by combining fractals with other indicators and proper risk management, you could find some great trade setups using the fractals. Do not use fractals in isolation because of the high number of false signals generated.

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