[ Advanced Technical Analysis Using Fractals ]-Steemit Crypto Academy | S5W8 | Homework Post for @reddileep

Hello Professor @reddileep. It is sad that we are coming to the end of this wonderful season. I think we need more classes like this one in which we are taught real content of value and totally useful.

Let's start

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1. Define Fractals in your own words.

From a mathematical and geometrical point of view, fractals are objects that repeat in the same pattern at different scales and different orientations.

Fractals in trading, on the other hand, refer to patterns of candlestick structures that repeat in a reiterative manner throughout the evolution of the price chart. As in theory, these patterns repeat at different scales and in different cycles, they can help us in some way to predict the future of a price just by studying past behavior.

From a practical point of view we can see fractals as zones of exhaustion of a trend or breakout of a structure; for example in an uptrend when we see higher and higher highs until suddenly a lower high occurs, we are in the presence of a bearish fractal.

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And the same is true for a fractal in a downtrend, when we see lower and lower highs until suddenly a higher high occurs… we can detect a bullish fractal.

Personally, I see fractals as the first indications or alarms to enter a trade or exit a position, because as I said, they predict changes in price structure.

2. Explain major rules for identifying fractals. (Screenshots required).

Before explaining the rules, I was studying Bill Williams, after whom the indicator is named. Williams was the one who studied fractals applied to financial markets, starting from the premise that although the market behaves in a complex and random way, this complexity is formed by patterns similar to each other.

In fact, he also postulated that the Elliot Wave structure is fractal. And he was not wrong, you only need to look at an Elliot wave at different temporality to realize how the 1-2-3-4-4-5-A-B-C structure repeats itself over and over again.

Now to answer the question,the major rules for identifying fractals are:

1-First of all a fractal in a candlestick pattern is composed of at least five consecutive candlesticks. Also, the central candlestick must be larger or smaller than the candlesticks after and before it.

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2-There are two types of fractals that depend not only on the behavior of the candles but also on the current trend. Each fractal has its specific rules and represents a kind of maximum or minimum bounce of the price.

2.1-Bullish fractal: The central candle should indicate the lowest low, while the candles before and after show higher lows.

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2.2-Bearish fractal: The central candlestick should indicate the highest high, while the candlesticks before and after it show lower highs.

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3. What are the different Indicators that we can use for identifying Fractals easily? (Screenshots required).

William Fractal Indicator

As we saw in class the first indicator is the William Fractal Indicator, named after Bill Williams who studied fractals as applied to financial markets.

This indicator is one of the easiest to use since it shows you graphically (through red and green arrows) the inflection points or fractals that are generated in the price.

In other words, the indicator detects and makes visible bullish fractals and bearish fractals patterns and points them out.

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Traditionally the arrows can be interpreted as buy and sell points, red arrows below the price for buying, and green arrows above the price for selling. However, I personally believe that we should take these points for what they are: fatigue points of the current trend, which may foresee a change of trend but are not 100% infallible.

Fractal Support Resistance

This indicator takes fractals to another level, as it is responsible for detecting fractals and then marking lines of Resistance and support based on those fractals.

This indicator is based on the principle I discussed in questions 1 and 2, which stipulates that fractals are signals of trend exhaustion, so they can easily function as relevant new supports and resistances. However, the indicator does not take into account all fractals, but only the latest fractals from different higher time frames.

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This indicator draws a resistance line when it detects any fractal above the price and a support line when is below.

The way to trade with this indicator is to do it with the strategy of breaking and retesting support or resistance or using the trend reversal strategy when the price bounces off one of those levels.

To my way of thinking, this indicator is just a little more complete than the previous one, since it adds the study of supports and resistances.

Fractal Breakout

In this indicator, the level goes even higher, in fact, more than an indicator it is a trading strategy that only works to place buy entries.

This indicator detects the last fractal top and shows a buy signal when the price breaks it. The buy signal is through a blue arrow and the word "Long". The exit signal occurs when the average of the fractal tops falls and is represented by a magenta arrow and the text: "close entry order long".

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Additionally, the indicator shows a blue (sometimes green) line representing the average price of the last fractal tops.

As relevant data (I say this from experience) do not forget that the most important data that can be configured is the exit condition delay, which is 3 candles by default.

Fractal Alligator

Again this is not just one indicator, but a joint strategy between two indicators, both developed by Bill Williams in which the fractal detection indicator is joined with the moving averages of the Alligator Indicator.

In this case, the fractals will function as primary buy or sell signals which will then be confirmed by the alligator.

As we already know the alligator is made up of 3 moving averages of different periods. Actually, this indicator is complex and it would require a whole class to explain it, so I will just say that the buy and sell signal will be when the three lines cross. This is the indication of a change in the trend.

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As you can see, all these indicators have one thing in common: they are all based on identifying when fractals are generated in the candlestick structure, and interpreting what they represent for the current trend.

4.Graphically explore Fractals through charts. (Screenshots required).

In this part, we will realize that chart patterns differ from the fractals previously seen in that they can be composed of more than 5 candlesticks with different patterns such as flags or wedges for example.

For this part, I will use the Bar Patterns tool on the ETH/USDT pair at different time frames.

1-My first sample occurs at 2h timeframe in the retracement of an uptrend, probably an Elliot wave 2 between October 15 and 20, 2021. There is a similar fractal between October 28 to November 1 as seen in the images.

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2-Another pair of fractals occur between December 15 and December 17. As can be seen in the images these are severe price drops followed by an almost immediate recovery. This case occurs at a 1-hour time frame.

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3-My last case we find it at a time frame of 15 minutes, between January 2 and January 3, 2022. In it, we see a flag structure before an upward movement (in both cases).

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5. Do a better Technical Analysis identifying Fractals and make a real purchase of a coin at a suitable entry point. Then sell that purchased coin before the next resistance line. Here you can use any other suitable indicator to find the correct entry point in addition to the fractal. (Usually, You should demonstrate all the relevant details including entry point, exit point, resistance lines, support lines, or any other trading pattern).

I know it will sound funny Professor @reddileep, but this was the first question I answered...I don't usually do things backward, but I saw the opportunity right after reading the class and couldn't waste it.

I placed this trade on Monday, January 3, 2022, at 10 PM UTC. The asset to trade was Bitcoin Perpetual Futures, which as I said in my previous assignment is an asset type that allows trading the Exchange FTX. Through it, you trade (with REAL MONEY) through price variation.

As I stated before, the collateral that the Exchange allows you to use is the USD stored in the account. By the way, although I recovered, I am still in a negative balance from last time. However thanks to my other assets in the account, the system allows me to continue trading up to a certain negative balance.

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It didn't take me long to find this trading opportunity, it found me right after I read the class. In this chart, I can see several price action patterns and indicators that helped me to make a supported and responsible decision. I will use a joint strategy between price action, support and resistance study, William Fractal Indicator, and MACD divergences.

Before I continue, I should clarify that I will use a special type of MACD called MACD 4C which refines the information of EMAs and histogram into a single histogram which in my view is easier to read.

Analysis

1-I start by analyzing the 4-hour BTC chart. In it, I can see 2 areas: 1 key support area and 1 key resistance area during the last week, between the levels of 48000 USD and 45500 USD. These two areas will be my support and resistance.

As you can see, the price has reacted up to 5 times on that support. In fact, the price has just reacted to the support.

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Additionally, thanks to the MACD I manage to see a divergence that has been forming since December 30 every time the price retest the 45500 USD level.

These clues make me think about a trend Reversal and placing a buy entry. However, first I will verify it with the William Fractal indicator.

A secondary analysis that I also did was the exploration of previous fractals, through the "Bar Patterns" tool during the day on December 29.

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As you can see around the lower low, higher lows form and a candlestick structure that resembles the current structure.

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By the way, again in 1-hour timeframe, we can better see the divergence in the MACD.

ENTRY

2-When I switch to a 1-hour timeframe I see what I was looking for, the William Fractal indicator Buy signal with the red arrow below the lowest point of the fractal.

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I should also clarify that I did not make my entry as soon as the indicator pointed it out, but waited for the next two bullish candlesticks to give me a better clue about the fractal. Something beautiful about this is that you can see how the William Fractal indicator showed the buy signal just when the price reacted with the support I had previously stipulated.

3-After having all these entry confirmations together, I headed to my FTX account to make the purchase.

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I made a purchase at the market price of 46014 USD. In the image, you can see in real-time my profit or loss amount at the moment of placing the entry.

EXIT STRATEGY

For the exit, in theory, I should choose the support level that I set at the beginning between 48000 and 47500 USD. However, I wanted to try something else. So I used the Fibonacci Retracement tool to look for an additional exit level.

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In theory, what you are looking for here is a major Fibonacci level where the price can peak and then fall back down. The key Fibonacci levels for me are 0.618 and 0.667 which are between 46900 and 46800 USD. So I will do the following:

4-I will set two exit scenarios, which can easily work as a take profit 1 and take profit 2. Scenario 1 will be with taking profit at 47500, with which I expect the price to react with the resistance level and the William Fractal indicator to give a sell signal.

My second scenario will be the 46900 USD level, where the price is likely to pull back and the William Fractal indicator will also give a signal. For this reason, I will not place a take-profit order, I will evaluate the market myself, and depending on how the price behaves and what the William Fractal indicator indicates I will take one scenario or the other.

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5-On the other hand, for safety I will set the stop loss just below the support zone at 45500 USD. As this support zone has been strong in the past, I expect the price to respect it.

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Again I go to my FTX account to place a stop market close order at 45500. This will be my stop loss in case the price does not respect the support zone.

Final Development

Throughout January 4th the uptrend developed as I had foreseen in my initial analysis. First, the William Fractal indicator showed 3 sell signals, before reaching the Fibonacci level of scenario 2. The funny thing is that at the Fibonacci level (46900 USD) there was no sell signal, so I did not sell. The magic happened later.

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As we had predicted in my scenario 1, the price reached the resistance level (47500 USD), and it was confirmed by the William Fractal indicator that indicated a sell signal. I did not think twice, here is the proof of my sell position.

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This is the link: https://ftx.com/shareable-pnl/published/959954

Again we can see the change in the USD balance of my account due to this winning trade.

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CONCLUSION

I don't want to be condescending, but I really think this strategy is wonderful, it's excellent.

I have tried many indicators and many strategies, but understanding the concept of Fractals has helped me to understand trading from another perspective.

In fact, thanks to this assignment, I have learned that fractals are not just random repetitive patterns, but to some extent, they show us exhaustion in the trends that can be used to take advantage of a great position in the market.

On the other hand, the William Fractal indicator has proven to be an invaluable tool to easily identify fractals and possible entry and exit points.

As a final comment, I must say from experience that we should never leave the responsibility of decision making to the indicator, but our entries and exits should be supported by a more robust analysis between reading other indicators, divergences, and market interpretation... the indicator should only work as a confirmation of what is already known previously in the analysis.