7.34 Strategy: The Fractal Breakout

Developed by the legendary trader Bill Williams, the 'Fractal' indicator is a mathematical tool that highlights localized micro-highs and micro-lows on a chart. It brings order to chaos by automatically pinpointing the exact peaks and valleys of market structure.

A 'Up Fractal' forms when there is a high surrounded by two lower highs on the left and two lower highs on the right. A 'Down Fractal' forms when there is a low surrounded by two higher lows on each side. The Fractal Breakout strategy uses these specific mathematical peaks to trade precise trend continuations.

Fractals are useless in a sideways market. You must pair them with a trend filter. Bill Williams used the 'Alligator' indicator (a set of three smoothed moving averages offset into the future). When the Alligator's 'mouth is open' (the moving averages are fanned out and pointing strictly upwards), you only look for Bullish Fractal breakouts.

In a bullish trend, wait for the price to pull back slightly and print a Down Fractal (a micro-bottom), followed soon after by an Up Fractal (a micro-top). The tip of that Up Fractal represents the immediate structural resistance.

Place a Buy Stop order 1 pip above the tip of the most recent Up Fractal. When the price resumes the macro trend and breaks that fractal, your order is executed. Your Stop Loss is mathematically placed 1 pip beneath the tip of the most recent Down Fractal.

You can use this strategy to pyramid (scale into) a winning trade. Every time a new valid Up Fractal forms and is broken in a bull trend, you can add another position, drastically compounding your profits on a single macro wave.