Fractals belong in the more abstract bracket of mathematics and are used in trading to help identify points in a chart where a reversal looks likely.
Traders may use fractal signals to decide where to place stop loss orders and other settings on their trading platform.
What is a fractal?
As is often the case in mathematics, the more abstract the concept, the more difficult are the sums and equations to define it.
Let's assume, then, that most readers of this article are not mathematical experts and try to describe the nature of a fractal without the need for complex maths.
Simply put, a fractal is an object - naturally occurring or artificially generated - that exhibits replicating patterns at increasingly small scales.
Fractals can occur naturally. Snowflakes, for example, exhibit fractal repetitions on each arm of the ice crystals that form them.
Look at the romanesco broccoli below and how its individual florets repeat each other, getting smaller and smaller and appearing to weave a spiral down to the very tip of the vegetable.
Meanwhile, graphic artists use computer-generated fractals to develop some stunning images or works of art that display replicating patterns of immense complexity.
US trader Bill Williams is the author of several books on trading philosophies and technical analysis. He has often used a closely-related topic - chaos theory - and fractals in trading financial markets.
His theory cannot be considered to be watertight - what trading theory can? - but it can be seen to work many times over when studying historical charts.
Here's how it works:
Fractals can be seen forming on charts of any asset price. You must have charts capable of technical analysis, set to candlestick mode. Fractals form over at least five bars on a candlestick chart - representing five consecutive sessions of price movements.
An up fractal is formed when a single candle has two candles to the right of it showing lower highs and at least two candles to the left of it also showing lower highs.
The chart above shows: