Trading With the Bill Williams Fractal Indicator

The Bill Williams fractal indicator is an indicator that can be used as a standalone tool or in combination with several other indicators. 

Fractals are a natural phenomenon of reversals within reversals. In order for a fractal to form, there needs to be at least five candles. There needs to be a series of five consecutive candles where the middle candle is the highest while the fourth and the fifth candles are lower. The market can go in the other direction, obviously, meaning that you can get a fractal when the middle of five candlesticks is the low of the group, followed by a couple of candlesticks that are higher than that level. 

The Bill Williams fractal indicator is built into your Metatrader platform, right along with several other Bill Williams designed indicators. There is a good reason for this. Bill Williams is regarded as one of the forefathers of modern technical analysis. 

Adding Bill Williams Fractal Indicator in Metatrader

Adding the Bill Williams Fractal Indicator in Metatrader is very easy because it is already built into the platform. There is no need to go out and download something else. You can simply select the indicator to add it to your chart. 

In order to add it, do the following: 

Click on Insert from the top ribbon of the platform and pull down the menu. From there, select Insert, and then select Bill Williams. After that, you select Fractals. At this point, the dialog box opens with the single option color. At this point, the trader can choose whatever color they want, the indicator will function the same regardless. It simply looks for the fractals as described above, and will then mark them with a colored arrow.

The Bill Williams Fractal indicator will then be placed on the chart, showing fractals in whatever time frame you choose to trade. The default setting is a gray three-dimensional arrow, as you can see on the chart below. It features gray three-dimensional arrows that show when a fractal has been formed. Notice that for each fractal, you can count that there are five candlesticks with the middle candlestick being the highest or lowest of those five, showing how the markets have tried to break higher or lower, but simply could not. 


 

Now that the indicator is on the chart, it will tell you when a fractal has been formed. Contrary to what you may think at first, the idea isn’t to turn around and go with a fractal, rather, it is to go against it. If you think about it for a moment, it does make perfect sense. If a previous reversal area gets broken through, then, obviously, the market has shown some strength in one direction or the other. 

For example, if a fractal forms above the candles, it makes sense that if the market turns around and breaks above that level, then it will have broken a certain amount of resistance. After all, it’s where the price reversed the previous time. Obviously, the same thing can be said about a fractal that has formed based upon bouncing from lows, because if the market breaks down through there then obviously more bearish pressure has appeared.

In order to simplify this, take a look at the chart below. It features a couple of blue arrows, one of which is pointing at a fractal that has been printed on the chart, and the other blue arrow points at the candlestick that has broken above that fractal. This is a classic Bill Williams Fractal bullish signal. If you think about it, again it makes quite a bit of sense that a recent high of five candlesticks being broken to the upside shows renewed strength.
 

It should be noted that some people will use the Bill Williams Fractal indicator in order to find a trend line. For example, the average trend line will simply look for highs and lows and try to connect them going either up or down. 

However, with the fractal indicator, you are looking at areas that the market has paid the most attention to based on the fact that the area is the highest of five candlesticks. Looking at the chart below you can see that the EUR/JPY pair has formed several fractals on the way down in the Berkeley timeframe.

You can see how connecting the candlesticks with those fractal arrows forms a tidy trendline that the market certainly seems to be paying quite a bit of attention to. If you are looking to find a trendline that is based on important reversal levels, you can see that the indicator can come in quite handy. 

Another common use for the Bill Williams Fractal indicator is to confirm trends. For example, if the market is in a strong uptrend, there will be more fractals that are broken to the upside than the downside. That being said, the inability to break through the previous fractal can give you a hint that the market is getting ready to consolidate, or perhaps even change trends. The question then is whether or not the market is going to turn around and break through the opposite direction fractal, because at that point, the trend very well could be rolling over and changing. 

Take a look at the EUR/JPY hourly chart below. The market had been grinding to the upside, and as you can see the fractal indicator was quite busy. You can see the uptrend line has been broken to the downside but pay attention to how things played out heading into this. The three fractals to the downside continue to rise, and therefore you can connect the uptrend line in order to define the short term trend. 

Notice how the first fractal to the upside is followed by a higher fractal, which is then followed by a fractal that is lower than the second. The fact that the market couldn't break above there and continue the overall trend was the first sign of trouble. Instead of consolidating though, the market broke down through the uptrend line, and in the first candlestick that broke down through that trendline, the market had even broken through the bearish fractal that made up the last fractal on the trendline. In other words, there were a couple of reasons to think about selling at that point. As you can see, the market really broke down rather significantly afterwards. 

Using the Bill Williams Fractal Indicator With a Moving Average

The easiest way to use the Bill Williams Fractal Indicator is with a moving average. This allows you to stay on the right side of the trend anyway, and as a result you can avoid getting into too much trouble. For example, if you get a fractal that forms in the other direction of the trend, you simply ignore it, at least until the moving averages tell you it’s time to go in that direction as well.

If you are on a daily chart and you have a 50 day exponential moving average that is grinding to the upside, then you are looking for bullish fractals being broken as you not only have the fractal indicator pointing in that direction, but you have the longer-term traders hanging on to the move as well, so at this point you have at least a couple of reasons to think about going into that trade.

The chart below features fractals on a daily chart, mixed in with the 50 day exponential moving average. The chart is in an uptrend based upon the moving average in the second half of the chart. As you can see, there are several red boxes that highlight bearish fractals that formed during the move to the upside.

While technically these are signals if they get broken below. There is a string of bearish fractals in the second box that do get broken slightly, by paying attention to the fact that the 50 day EMA is still grinding slightly higher, it keeps you out of those potentially troublesome trades.

This is yet another way to combine a couple of indicators in order to avoid a lot of false signals. This will be especially crucial if you are to trade using this indicator on a shorter time frame.

Fractals as Part of a Larger System

It should be noted that the Bill Williams Fractal Indicator is part of a larger trading system that he built. He uses the Alligator Indicator that he also designed in order to trade this market. The Alligator indicator features three moving averages of their smoothed out but is essentially a simple triple moving average system. The 13, 8, and 5 smoothed simple moving averages are used for this indicator, and as the indicator spreads out it shows a stronger trend in general. 

Bill Williams suggested the following ways to trade the two indicators together:

• Always trade with the teeth, which is the 13 moving average, colored blue.

• The moving averages need to be spread out.

• If the buy fractal is above the teeth, then you place a pending by order just above it.

• If the buy fractal is below the teeth, then you ignore it.

• If the sell fractal is below the teeth, then you place a pending order just below it.

• If the sell fractal is above the teeth, then you ignore it.

Take a look at the chart below. You can see that there are fractals that eventually get broken to the upside that were signals to start buying. Simultaneously, you can see that the alligator was rising with spread out moving averages. This is a classic example of how Bill Williams would have traded this pair. You can see the set ups based upon the blue arrows and blue lines at the scene of the breakout.