Bill Williams’ Fractals As A Trailing Stop

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Thought this was quite an interest concept for a trailing stop. Note, this is based on how MT4 draw Fractals, other platforms may draw them differently and thus may not be so good. But if that is the case I am sure you can work out what the difference is (as it will be consistent) and just offset the fractal in your mind. The actualy bar on which the fractal is placed should be the same on any chart.

“In order for a fractal to form, there should be a series of 5 consecutive bars where the middle bar will be the highest preceded and followed by two lower neighboring bars on each side:

– a Buy fractal forms at the top of the price wave with the Highest High in the middle and two Lower highs on each side;
– a Sell fractal forms at the bottom of the price wave with the Lowest Low in the middle and two Higher Lows on each side”

Click to Enlargefractals

As you can see by the chart below it is a very simple concept. Assuming you have an entry method in place, once you have entered a trade you place your stop at the point of the turn fractal and then you just trail it down to the next fractal. When the price crosses the level of the closest ‘point’ that is when you exit your position. You do not wait for bar closure. In reality all you are doing is trailing your stop from the previous high to the lower high on a short trade, for example, but rather than have your stop at the actual high you have it at the point of the fractal (which seems to be offset by about 6pts on a 5 min chart).

For whatever reason it works very well. Naturally, you have the usual problems of choppy ranges and a taking several losses in a row but it is a great way to keep you in a trade on the longer moves. If you are fan of using higher highs/lower lows in your trading you may want to take a look at this.

2 Responses

  1. Jason says:

    Today is a great example of how it can be useful. Look at the FTSE chart below. Doesn’t matter which direction you traded in…you would still be in the trade and not stopped out whilst it has chopped around for nearly 3hrs. So I guess it can actually help in choppy times as if you had been stopped out by another method you may be tempted to jump in again….and get stopped out again.

  2. Dzik says:

    You can also use two fractals, giving the market more room. That is good when you are waiting for the Alligator to wake up.

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