If you look closely at the seemingly chaotic fluctuations of currency pairs, you will notice the cyclical nature of rate changes. This process is especially clear when using the Moving Average an indicator based on the average values of the candlestick closing prices.
One of the attempts to profit from this cyclicality is Fractals. Today we will talk about what this indicator is, what are its pros and cons, as well as how to profit from it when trading Binary Options.
Strategy for trading binary options using fractals
Cyclicity is a way to accurately predict fluctuations in the future, but the problem with the markets is that price waves have different frequency and amplitude.
The profitability of any trading system depends on the constancy of these parameters. The trader’s task is to select such a period (step, level, etc.) in the parameters of indicators and filters, with which it would be possible to describe the current cyclical rate changes as accurately as possible. In this case, the strategy gives out a buy signal exactly “at the bottom” and often predicts the continuation of a trend wave or the end of a directional movement as a top ideal for selling.
All calculations of indicator curves and graphical analysis are based on past quotes, because future quotes are a repetition of history with a certain “current error”. Having solved this coefficient, the trader will receive the “grail” a system that trades with virtually no losses.
Today, the science of trading uses three approaches to find the perfect trading system:
- Adaptive coefficients that calculate the non-linear relationship between the price and time chart;
- Neural networks that are tuned in to search for “special patterns” between the price in the past, helping to predict the future;
What are fractals?
Fractals are objects consisting of a set of self-similar copies, therefore, when divided into any parts, their structure will be 100% the same as that of the whole object.
The simplest example is corals, a small fragment, or a whole island of polyp skeletons (atoll) will have the same geometric structure. The same applies to the human circulatory system or bronchi, any fragment resembling an integral structure.
Benoit Maldelbrot decided that such a property deserves to be separated into a separate geometric figure, calling it a fractal.
Its main features:
- The uniqueness of the lines they should not be similar to the already known polyhedral figures (the crystal lattice of a diamond cannot be a fractal);
- Self-similarity of parts and whole;
- Metric dimension.
- The last sign suggests that the structure should allow finding comprehensive rules for its description. To understand how this works, consider the example of the similarity of fluctuations in stock quotes: stock, commodity and foreign exchange markets.
The first person to prove that the price movements of any asset obey the laws of self-similarity was Ralph Nelson Elliott. The American financier has clearly shown that whatever the trend, its future movement will develop in the form of five waves, regardless of the size of the timeframe.
Five-wave fractals are called the Elliott theory, which described all cases of possible price movement of any asset, using a total of 8 models.
Another theorist who used fractals in trading strategies in financial and commodity markets was Bill Williams, who described his vision of the structure of fluctuations, based on the wave theory.
Theory of fractals when trading binary options
Trading binary options involves analyzing price movements taking into account the time factor. The purchased contract makes a profit in the form of a premium payment if the forecast is correct at the time of expiration after the expiration date (in hours, days, minutes) selected by the user when the option was opened.
Bill Williams’ fractal structures are limited to a specific number of candles, which, in total, can give the option trader the desired position holding (expiration) time.
In the original strategy, the Fractals indicator is used by Bill Williams for trend trading, so we select the Above Below contract type for the trading system being created.
The deal is opened after two or one candlesticks after the appearance of the icon, the direction of movement of which should be opposite to the indicator sign. This technique is a tribute to the theory of Bill Williams, who believes that after the fractal there are correction candles in order to comply with the condition of the Elliott theory. Let’s add moving averages to the trading system, built on three highs and lows, which measure the “sufficiency of a pullback” after the fractal is opened.
We will choose a timeframe equal to 15 minutes, on the advice of Larry Williams. In short-term trading, this time frame has allowed the trading guru to win first places in the international competition for trading commodities futures.