Williams Fractal
Definition
The Williams Fractal indicator aims to detect reversal points through highs and lows. It’s known as being one of the first indicators to use fractals and bring it into the trading mainstream. Generally, the indicator is formed by five candlesticks or bars on the price chart and it’s shown with an up or down arrow to signal its high or low status.
History
This indicator was first developed and named by Bill Williams. He was an experienced trader and technical analyst that first introduced the indicator in his 1995 book, “Trading Chaos.” Some would say that Williams and his book where the first to make fractals a major component of the trading world.
Takeaways
The Williams Fractal indicator gained momentum because it was one of the earliest indicators to bring fractals and fractal methodology to the world of trading.
Arrows indicate where the fractals are placed on the chart. The indicator is usually pre-set to show fractals based on the 5-candlestick rule. Depending on the trader, you can alter and edit the indicator settings to include the number of candlesticks you’d like in one fractal.
According to Williams, the Fractal indicator should be used for trading strategies based on breakout of price levels. A breakout is indicated when price moves at least one point either above or below the previous fractal’s price level.
Similarly, a previous fractal’s breakout is called a breakthrough of buyers in the case that price rises above the previous upward arrow indicating fractal. The opposite occurrence, when price falls below the previous downward arrow indicating fractal, is called a breakthrough of sellers. Williams considers a breakthrough of either buyers or sellers to be a signal to open a trade position.
It’s also worth mentioning that this indicator is much more effective in trading analysis when paired with other indicators and tools. Consider pairing it with the Williams Alligator indicator, for example (created by the same author). In this case, a trader could use the Fractal indicator to spot market entry levels and then use the Williams Alligator indicator as a filter, avoiding opening positions at the breakout level in a trendless (weak) market.
What to look for
It is common for traders to place pending stop orders either a few points above or below the projected fractal level in order to open a position in the case of a breakout. Specifically in these cases, stop less is set at the level of the second to last opposite fractal.
Limitations
According to the principles of the indicator, there will always be considerable fractal lag (two or more candlesticks, give or take). It is a part of the indicator and it should be considered when traders opt to use it.
In order to aid with the fact that the Fractal indicator lags and does not have the ability to redraw, experienced traders and investors often suggest pairing it with other indicators that can alter these effects to a certain degree. As mentioned above, adding additional indicators and technical analysis tools can aid the efficiency of the indicator significantly.
Summary
The Williams Fractal indicator goes back to 1995 and it’s credited as being one of the first to combine fractals and trading. It’s generally shown by five candlesticks or bars on the price chart with the third candlestick always presenting as the highest high or lowest low. The indicator is marked on the chart with an up or down arrow to signal its high or low status and is commonly used in conjunction with the Williams Alligator indicator.