Using Fractals in Binary Trading

Using Fractals in Binary TradingThere are many different strategies used in the analysis of technical charts to figure out how to make potential binary options trades. Some of these are more complicated than others and different traders have different ones they like to use. One of the stronger and more widely used analysis factors is that which uses what is called ‘fractals’.

What exactly is a fractal? Fractals are considered to be a key indicator of a potential price reversal. They are plotted on a chart through the use of placing arrows or small triangles above or below an analysis chart candle.

If they are placed at a top of a candle they are considered an up fractal (the market is thought to be bearish here and you would place a put call option) and when placed at the bottom of a candle are considered a down fractal (the market is thought to be bullish here and you would place a buy on a call option); so the arrow or triangle positioning becomes very important in helping you determine whether to place a put or a call when making your binary option trade based on fractals.

Fractals are made of five candle formations. A fractal is considered bearish if it is formed when the highest part of the center candle is higher than both the candles that precede it to its left. A candle is considered bullish if its center candle low is lower than any of the other four candles. This may seem complicated at first, but most online trading programs will automatically display fractals if you have them selected.

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Fractals are known as constantly being ‘repainted’ on an analysis chart. This is because the next candle in the time frame being used can create a whole new fractal which makes the previous one obsolete.

Once again this may seem a little confusing until the method is used a few times to get the hang of reading the fractals and what each one represents. A trader must also be aware of not being too hasty to make a decision based on a fractal until the time period of the fractal has come to an end; otherwise repainting could take place and you will have made a trade based on what could be considered faulty information.

Again, overall when fractals are used properly, they are a very useful tool in helping a trader make a successful trade based on predicted price reversals.

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References and Further Reading:

1. An analysis of forward exchange rate biasedness across developed and developing country currencies: Do observed patterns persist out of sample? (G Loring, B Lucey – 2013)

2. The microstructure approach to exchange rates (RK Lyons – 2001)

3. Financial Integration and Trade Dynamics of the ASEAN Plus Three Countries (A dela Rosa – 2005)

4. Winning the trading game: why 95% of traders lose and what you must do to win (N DraKoln – 2008)

5. Algorithmic trading system: design and applications (F Wang, K Dong, X Deng – 2009)

John Miller
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John Miller

John has worked in investment banking for 10 years and is the main author at 7 Binary Options. He holds a Master's degree in Economics.
John Miller
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