Fractal Indicator

The fractal indicator identifies recurring five-bar price patterns that can signal potential trend reversals. It highlights local highs and lows that are higher or lower than the two bars on each side, applying the concept of self-similarity across time frames to price action.

What is a fractal?

A fractal is a specific five-bar pattern:
– Bearish fractal: the middle bar has the highest high of the five bars (an upside-down “U”).
– Bullish fractal: the middle bar has the lowest low of the five bars (a “U”).

Because the pattern uses five bars, fractals can appear on any time frame (intraday, daily, weekly), reflecting similar structure at different scales.

Definition (formulas)

Let N be the middle bar.

Bearish fractal (middle high greater than the two highs on each side):
High(N) > High(N-2), High(N-1), High(N+1), High(N+2)

Bullish fractal (middle low lower than the two lows on each side):
Low(N) < Low(N-2), Low(N-1), Low(N+1), Low(N+2)

How to calculate / identify

1. Spot a potential middle bar (N) that looks like a local high or low.
2. Check the two bars to the left (N-2 and N-1) — they must be lower highs for a bearish or higher lows for a bullish pattern.
3. Wait for two bars to the right (N+1 and N+2) to confirm the pattern. Only after those two bars form is the fractal complete.
4. Charting platforms often draw an arrow above (bearish) or below (bullish) the middle bar once the fractal completes.

What the fractal indicates

• A fractal marks a local turning point and the possibility—not a certainty—of a trend change.
• Bearish fractal: potential move lower after a local top.
• Bullish fractal: potential move higher after a local bottom.
• Because fractals are common, they are best used as confirmation tools rather than standalone signals.

Important practical note: the arrow appears on the middle bar, but the pattern only completes two bars later. The first tradable entry after seeing an arrow is the open of the third bar to the right of the middle bar.

How traders use fractals

• Filter fractal signals with a trend indicator (e.g., moving averages, Alligator) to take only fractals that align with the higher-timeframe trend.
• Combine fractals with support/resistance, Fibonacci retracements, pivot points, or volume to increase signal reliability.
• Use fractal highs/lows as reference points for stop-loss placement (beyond the extreme of the fractal).

Difference from chart patterns

• Fractals are fixed five-bar price formations automatically marked on charts.
• Other chart patterns (head-and-shoulders, triangles, flags) can span variable numbers of bars and usually require manual identification and interpretation.

Limitations

• High frequency of fractals leads to many false signals (whipsaws).
• The arrow placement can be visually misleading since it marks the middle bar, not the completion point.
• Fractals do not provide direction or magnitude; they only suggest potential reversal points.
• Effectiveness varies with market liquidity and volatility.

Fractals vs. support and resistance

• Fractals are pattern-based and identify local turning points.
• Support and resistance are horizontal or trend-based levels where price historically reacts.
• Use them together: a fractal that coincides with a support/resistance level is a stronger signal.

Time-frame and market applicability

• Fractals can be applied to any time frame (intraday or longer-term) and most markets (stocks, forex, commodities, crypto).
• Shorter time frames yield more signals and more noise; longer time frames give fewer, more meaningful fractals.

Practical tips

• Do not trade fractals in isolation. Require alignment with trend, volume, or other technical levels.
• Wait for pattern completion (two bars to the right) before taking action.
• Manage risk with defined stops and position sizing; treat fractals as one input in a broader trading plan.

Bottom line

Fractals are a simple, visual tool for spotting local highs and lows that might precede trend changes. They are most effective when combined with trend filters and other technical tools. Because fractals generate many signals, discipline and risk management are essential when incorporating them into a trading strategy.