Fractal Chaos Band indicator is a trend overlay. In 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, who was the first to use fractal geometry as a way to measure price movements of different securities. To most traders fractals are considered to be recurring patterns that can predict reversals in chaotic stock price movements.
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. 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.
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.
The Fractal Chaos Bands indicator is time depending on the number of time periods trader selected to plot the indicator. In fractal, the upper line is made by plotting stock price highs and the lower fractal line is made by plotting stock price lows.
The fractal indicator indicates a bottom or top. This indicator is composed of a minimum of 5 bars. The indicator is comprised of a series of at least five consecutive bars, where the highest HIGH is in the middle, and then two other lower HIGH on both the 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 up and down arrows. This indicator will automatically appear on a trader’s chart if they choose the fractal indicator. 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.
Fractal Chaos Bands Indicator connects the highest and lowest swing points on any timeframe with two lines and creates the band indicator. With the mentioned band 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. This technical indicator must be used alongwith other oscillators to confirm a breakout or breakdown in a matket.