Fractal Chaos Bands Indicator is a trend overlay. The stock market moves in a highly chaotic way. But at a larger scale, the movements follow a certain pattern that can be applied to shorter or longer periods of time. This technical indicator shows an overall scenario of the price action by filtering out the insignificant fluctuations or whipsaws out of the stock price.
It has been introduced by a famous Australian commodity trader and advisor, Edward William Dreiss. He was the first to use fractal geometry as a way to measure the price movements of different securities. To most traders fractals are considered to be recurring patterns that can predict reversals in chaotic stock price movements.
A famous Australian commodity trader and advisor, Edward William Dreiss introduced this indicator. This indicator draws bands surrounding the price and these bands are based on fractal geometry. Traders can have an idea of whether the market is trending or non-trending by looking at the bands.
This indicator gives an idea of whether the market is trending or flat. When the market is trending the bands has some slope towards the trend. On the other hand, when the market is flat the bands also does not have any slope. They are also flat during a non-trending phase.
Attaching The Fractal Chaos Bands Indicator On The Charts
The Fractal Chaos Bands Indicator use to identify whether the stock market is trending or not. In Zerodha Kite, this indicator is available under the studies and is used similarly to other bands-indicator.
Once you attach the indicator in Zerodha Kite you have the option to change the colors of the Fractal High, Fractal Low and Fractal Channel with an option to fill the channel with a color. Check the Reliance Industries stock chart above.
How To Read Fractal Chaos Bands Indicator?
In market trading, the bands will have a slope and if the market is not trending the bands will flatten out. If the slope of the bands decreases, it signifies that the market is choppy, insecure and variable, the graph becomes more and more abrupt, be it going up or down, the significance is that the market becomes trendy, or stable.
The Fractal Chaos Bands indicator is time depending on the number of time periods the trader selected to plot the indicator. In a fractal, plotting stock price highs form the upper fractal line and plotting stock price lows forms the lower fractal line.
How To Use Fractal Chaos Bands Indicator?
The fractal indicator indicates an interim bottom or top. This indicator is composed of a minimum of 5 bars. So at least five consecutive bars form this indicator, where the highest HIGH is in the middle, and then two other lower HIGH on both sides. The reversing set is a series of at least five successive bars, with the lowest LOW in the midst, and two higher LOWs on both sides, which correlates to the sell fractal.
The Fractal Chaos Bands have High and Low values and are indicated by the upper or lower line. Fractals can sometimes appear on the chart with only one candle to the right. In Fractal Chaos Bands indicator, a fractal with one candle to the right of it is an unconfirmed fractal, and it will disappear from the chart if price pierces through that level. Although a trader must wait for two candles to the right and then the fractal will always appear on the chart.
The Buy Sell Signals
This is a trend indicator. When the price breaches the upper fractal line on a closing basis, that is the buy signal. Similarly, when the price breaches the lower fractal line on a closing basis, that is the sell signal. You can trail the stop loss with the rising fractal line in case of a buy trade. On the other hand, you can trail the stop loss with the falling fractal line in case of a sell trade.
Watch the image above. First, the sell signal has come when the price closed below the lower fractal line. The sell signal has been closed and a fresh buy signal has come when the price closed above the upper fractal line. The buy signal has not yet closed as price never closed below the lower fractal line after that. So there is a huge profit opportunity if we can use this indicator wisely.
How To Avoid Whisaws?
To avoid false signals and whipsaws you can add a filter like a 100-period moving average. When the price is above the 100-period moving average, we can take the fractal line break on the upside as buy signals. But we will avoid buying signals when the price is below the 100-period moving average. Similarly, we can take all down fractal line breaks as sell signals when the price is below the 100-period moving average. We will avoid short selling when the price is above the 100-period moving average. Check the image below to understand the advanced Fractal Chaos Bands indicator trade setup.
For suggested reading, I recommend the following book: Fractal Trading II: Advanced Instruction for Trading Financial Markets. This can give you an in-depth idea of trading the fractals. This can give you an idea to project future prices in the financial markets.
Fractal Chaos Bands Indicator connects the highest and lowest swing points on any timeframe with two lines and creates the band indicator. With this band, it is extremely easy to interpret when the market is trending or when it is choppy. Fractals make an excellent decision as a support tool for any trading method. We need to use this technical indicator along with other oscillators to confirm a breakout or breakdown in a market.