Among the many strategies, we can mention a very interesting one – trading on two-fractal candlesticks. During testing, it turned out that the strategy of trading on two-fractal candlesticks is very effective, if certain rules are observed.
What is a fractal?
In trading, the first to develop and apply the fractal theory was B. Williams. Williams. There is nothing complicated in the definition of a fractal, in fact it is a local extremum, which is calculated from five (sometimes from more) bars (candlesticks) that are close to each other. Usually, the fractal is the central bar (candlestick), the minimum or maximum price values of which are higher (lower) than the adjacent bars.
Fractal indicator
To identify fractals, a trader does not need to perform complex calculations or graphical constructions, there is a convenient indicator built into MT4 for this purpose. It is quite easy to call it on the chart – in the navigator window open: ‘Indicators’ – ‘Bill Williams’ – ‘Fractals’. Just drag it to the chart with a mouse and it will mark fractals by itself, and the indicator does not require any additional settings.
A two-fractal candle
If out of several bars, the central one is higher than all of them, it is called a fractal up, if the situation is opposite, then the central bar can be called a fractal down. But sometimes it happens that one candle is bigger than the neighbouring candles and it is the candle that is both the local minimum and the local maximum, so you get both a down and an up fractal at the same time. Such a candle is called a two-fractal candle.
‘Bullish’ and “bearish” bifractal candlestick
When studying two-fractal candlesticks, some regularities were discovered, which later allowed to create a trading strategy. Thus, it was noticed that after the formation of a two-fractal candlestick, the price in the vast majority of cases, moves in the direction where the shadow of the candlestick is longer. If the lower shadow of a two-fractal candlestick is longer than the upper one, it is considered to be a ‘bearish’ two-fractal and the price will move downwards. If the upper shadow is longer, it is a bullish bifractal.
Rules for opening and closing orders
The order is opened in the direction where the shadow of the two-fractal candle is longer. Taking into account the fact that a two-fractal candle becomes a two-fractal candle after the closing of two subsequent candles, it is necessary to look at the value of stop loss. Usually, the stop is set a few points above (below) the extremum of the bifractal and if the stop will be very large, it is better to ignore such a signal.
Also, it is better not to open an order if the shadows of two fractals have approximately the same length. You can fix the profit when the opposite candlestick extremum is reached. It is better to fix part of the profit near the extremum, and the second part – as practice shows, in most cases, the price reaches the level of 161.8 Fibo from the size of the two-fractal candle, but after fixing part of the order at the mark of 100 Fibo, the transaction is transferred to breakeven.