Fractal Trading Strategy with RSI Filter

Fractals are local extrema that regularly appear on the candlestick chart. Their formation precedes the price movement in a certain direction. Fractals themselves allow you to find the best entry points into the market. However the accuracy signals not too high. You can increase the passability of predictions by using additional indicators (we advise these indicator reviews and oscillators from InvestMagnates.com) and instruments. In this article, we will consider a fractal trading strategy using the filter RSI.

What are fractals

The term was coined by the famous trader, Bill Williams (Wikipedia), who is the author of Chaos Theory and the creator of several very popular indicators. Fractals in the sphere of stock trading have nothing in common with a similar concept from mathematics. As it has already been said above, they are extremums, i.e. points of price minimum and maximum for a certain period of time. Each fractal consists of 5 candlesticks, the central one of which is directed either upwards or downwards.

Two identical candlesticks may represent part of a composite construction of different fractals that are in close proximity to each other. In rare cases, formation of two extrema on the same time interval is possible. On a real chart, the fractals look as follows:

A special indicator called Fractals has been developed and is included in the standard list of the Meta Trader terminal (official website). However, in the trading platform Binomo (bonus 100% to deposit by promo code REVIEWEEK100 – Activate) it is absent. Instead, an equivalent alternative is offered – “Bill Williams’ AlligatorThe option to show price extremes is built in.

RSI indicator

This oscillator allows you to determine the active phase of the market – trend, Flat, overbought or oversold. The tool is universal, which is why it is widely used in various trading systems. The indicator consists of one signal line, which deviates between 0 and 100. There are levels 20/80 or 30/70. If the price gets to these levels, it means that the active trend has exhausted itself and the tendency began to weaken – a reversal should be expected.

Rules for entering the market

Strategy is based on trading in the conditions of the termination of a pronounced trend and the emergence of a new trend. Such moments can be detected with the help of the RSI oscillator. The option is bought as soon as a fractal appears. If the market comes out of the overbought condition, then the trade should be opened after the formation of the first extremum, directed upwards. It appears after the RSI line crosses the signal level.

Trading on a downtrend reversal is carried out in the same way. The oscillator must move out of the 20-30 zone (oversold), and immediately after the formation of a fractal, a deal is opened to increase the rate of the asset. The alligator indicator does not play a key role in this trading system, its signals are not taken into account – attention is paid only to price extremums. An example is shown in the picture below.

At the beginning of the article, it was said that each fractal consists of 5 candles. Therefore, it appears with a slight lag. For clarity, the entry and exit points of the market are marked with pointers. According to the requirements of the strategy under consideration, it is required to choose the expiration time, which exceeds the duration of one candle by 4-5 times.

Traders are advised to enter the market only if a fractal is formed in the correct form – in the form of a “pyramid” of candles, directed downward, or upward. If in the immediate vicinity of the market exit point from the oversold/oversold condition a chaotic sequence of colored candles is observed, then this extremum is recommended to be skipped.

Example of trading on a real deposit

The asset CRYPTO IDX was chosen for trading. It is excellent for small timeframes, because the price is well “listened to” signals of technical analysis. The market was oversold, as evidenced by the RSI at levels 30 and 70. It remained to wait for the signal of a trend reversal.

The oscillator line has moved out of the 30 zone. The uptrend began to emerge. Immediately after the formation of a downward fractal, a trade was opened for 1 minute (4 candles for 15 seconds).

The fractal indicator signal, filtered by the RSI oscillator, met expectations – the option closes with a profit. There is a clear pullback in price in the market. It was earned 79% profit on the investment in just 1 minute.

Conclusion

The oscillator is the key link in the combination of “Alligator” with the display of fractals and RSI, because the trade is focused on a trend reversal. If you use the indicators separately, the percentage of profitable transactions on the signals will be significantly lower.