It is difficult to define the best points of trading entry and exit, and that’s why some indicators, such as the Williams Fractals, make this job easier.
It is also named to show the points of reversal and to create strategical levels on the chart. It is going to be one of the main reasons why this particular fractal will be highly regarded among traders.
But it is worth describing how the Williams Fractal works, how it is created, what it is used for, and, naturally, its shortcomings.
The following article touches upon the creation of Williams Fractals, real-time application, and some effective trading strategies.
What are Williams Fractals?
Williams Fractals are a chart pattern that indicates a potential reversal in the market.
It is represented as signals above or below price action, forming “up” or “down” fractals:
- Up Fractals: Form at the high of an upside-down U-shaped price pattern.
- Down Fractals: Form at the bottom of a regular U-shaped price pattern.
How Fractals Are Created
U-Shape Formation
- The indicator identifies a U or inverse U shape on the chart.
Signal Placement
- Up fractals are marked above the high of the U-shape.
- Down fractals are marked below the low of the U shape.
This ensures the printing of fractals only after the pattern is complete at the U bend, hence introducing a lag between the signals.
Signals in Real Time: The Catch
While historical fractals seem to perfectly capture the price reversals, they lag behind price action. The indicator cannot predict fractals in real time because the U shape must complete first.
Real-Time Application
To deal with this limitation:
- Enable real-time signals, allowing fractals to print on the current bar.
- Trade-Off: Real-time signals are less accurate but offer more timely entries.
Adjusting the Indicator Period
- Longer Periods:
- Fewer signals mean larger market moves.
- Increased lag, missing small reversals.
- Shorter Periods:
- More frequent signals.
- Less lag, intraday trading is appropriate.
Strategies Using Williams Fractals
1. Momentum Breakout Strategy
This strategy exploits the importance of fractal levels.
- Fractal levels are price levels where reversals have occurred.
- The price breaks through a level in a fractal—a sure sign of strong momentum.
Steps
- Identify fractal levels: up fractals for resistance, down fractals for support.
- Enter a trade in the direction of the breakout:
- Bullish Signal: When price breaks above an upward fractal.
- Bearish Signal: Price breaks below a down fractal.
- Set the stop-loss orders:
- Just below the fractal level in the case of a buy.
- Just above in the case of a sell.
2. Entry Signals in Real-Time
Trade more efficiently using the fractal signals in real time:
- Wait for it to print a fractal.
- Confirm the signal using another indicator or trend analysis.
- Enter trades based on the fractal’s direction.
Improving Williams Fractals with Other Indicators
Williams Fractals work most efficiently when combined with other indicators:
Directional Movement Index (DMI) and ADX
- DMI gives the indication of trends.
- ADX measures the strength of trends.
Use them to confirm whether a fractal breakout coincides with a strong trend.
Williams Alligator
- The Alligator indicator is designed to work specifically with Williams Fractals.
- This strategy combines moving averages to trace trending and filter out some fake fractal signals.
Key Considerations
- Lagging Nature: Fractals can only be formed by accomplished patterns; hence, they are not predictive but rather responsive to nature.
- Context is Everything: Use fractals in combination with broader market analysis and other indicators.
- Customization: Adapt fractal periods to suit your trading style and current market conditions.
How to Use Williams Fractals on Trading Platforms
To make things easier for you, tools such as custom indicators on TradingView can further streamline your workflow:
- Automatically give fractal levels.
- Enable/disable real-time signals.
- Adjust periods to experiment with different setups.
Conclusion
Williams Fractals are a great tool that will help you to identify important price levels, giving a lot of input about your trading strategy.
Nevertheless, because of their lagging nature, they cannot be so efficient on their own while their combination with other indicators and strategies unlocks their full potential.
Whether you trade the breakouts or the real-time signals, mastering Williams Fractals will notably raise the level of your trade’s precision.
If you’re looking for more advanced strategies, consider one of the paid-for indicators or check out some of the other related tools, such as the Williams Alligator or DMI, to complete your trade.