How to combine trend tracking with reversal signals in fractal trading?

As the holiday is over, EagleTrader here to wish all traders a good start! During the just-passed Spring Festival, the foreign exchange market experienced drastic fluctuations due to the uncertainty of the tariff situation and the upcoming economic data. This week, the market is expected to continue the range fluctuation before the data is released. Against this background, this article will share with you a flexible trading technical analysis method – fractal trading. It can be used for trend tracking and capture reversal signals, and is an important tool for traders to seize opportunities in complex market environments.

What is fractal trading?

Fractal trading theory is a financial market analysis method based on the principles of fractal geometry. Fractal geometry reveals self-similarity and irregularity in nature and financial markets, and fractal trading takes advantage of this characteristic to predict future price trends by identifying repetitive patterns in the market.

For example, when the market rises, the buyer’s willingness to chase high prices rises, and the price continues to rise. But as time goes by, the buyer’s willingness gradually weakens and the price eventually falls. At this time, the market may be affected by new information, and buyers and sellers will have differences on prices. When the buyer’s intentions surpass the seller again, the price will rise again. The price highs and lows formed in this process form the basic structure of the fractal.

When will fractal trading be used?

Continuation and reversal of trend

Fractal pattern can help traders identify the continuation and reversal of trends. When the price trend has repeated fractals, it indicates that the trend may continue; and when the price trend has opposite fractals, it indicates that the trend may reverse. For example, if you see several consecutive upward fractals, it may mean that the market is in an upward trend, and you can consider going long with the trend.

The perfect partner with the crocodile indicator

The combination of fractal and crocodile indicator can form a powerful trading strategy. The crocodile indicator consists of three lines, representing the crocodile’s lips, teeth and jaw. When the fractal signal appears below the center line of the crocodile (orange line), it can be regarded as a bullish signal; when the fractal signal appears above the orange line, it is a bearish signal. This combination is like installing a “navigator” to help traders find the timing of entry and exit more accurately.

Correlationship with the moving average

Fractals can also exert strong power when paired with moving averages. In an upward trend, if bullish fractals appear and the price breaks through the moving average, then this is a strong buying signal; while in a downward trend, if bearish fractals appear and the price falls below the moving average, it is a good opportunity to short. The moving average is like a “lifeline” that helps traders confirm the effectiveness of the fractal signal.

How to trade with fractals?

(1) Choosing the right cycle

Fractal trading requires choosing the right cycle to observe the market. Generally speaking, the shorter the time frame, the more “false” fractals and breakthroughs appear.Therefore, it is recommended to look for fractal signals on larger time frames (such as daily or weekly lines), which can reduce interference from false signals and improve transaction accuracy.

(2) Confirmation in combination with trading volume

The true fractal breakthrough in any time frame should be confirmed by a specific trading volume. If the closing price of the breakout candlestick far exceeds the accumulation level and the trading volume is large, then this fractal signal is more reliable. On the contrary, if the trading volume is small, even if a fractal breakthrough occurs, it may be a false signal and needs to be treated with caution.

(3) Setting a reasonable stop loss and take profit

In fractal trading, the setting of stop loss and take profit is crucial. For stop loss, the stop loss point can be set at the relative extreme value of the last two fractals. For example, if it is a buy signal, the stop loss can be set below the lowest point of the most recent bearish fractal; if it is a sell signal, the stop loss can be set above the highest point of the most recent bullish fractal. As for stop-profit, you can set it according to your trading strategy and risk tolerance, but you must have a clear stop-profit goal to avoid greed and profit rebate.

Fractal trading is a technical analysis method based on market self-similarity and identification of key high and low points. Its characteristics include self-similarity, hysteresis, a combination of trend tracking and inversion signals, and its application to a variety of time frames. Although fractal trading is simple and intuitive, its effectiveness highly depends on the cooperation of the market environment and other technical indicators. For traders, fractal trading can be an important tool in the toolbox, but it needs to be combined with other analytical methods and strict risk management to improve success rates.