Before looking at the use of fractals in binary options trading, it is important to understand exactly what fractals are, where they can be found and what to do with them.
A fractal is a type of indicator which is offered by the majority of trading platforms. It is used, depending on the time frame being considered, to find possible bottoms and tops made in the market. For example, when a fractal indicator is applied to a monthly or weekly chart, with a period of 10 being used to calculate the fractal, the last 10 candlesticks, 10 weeks or 10 months are being taken into account.
In the event of a bearish fractal, the indicator will appear as an arrow on top of the candlestick, while in a bullish fractal, the arrow will appear below the candlestick. A trader knows that if the fractal is bullish they should place call options, whereas they should place put options in the event of a bearish fractal. However, it is essential to bear in mind that fractals change frequently. The market will constantly be making new highs and then the existing fractal will be removed and a new one will then appear on the next candlestick. A trader must be aware of this confusing element when putting the indicator onto any time and then looking back to test the historical results.
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Fractals as Contrarian Signals
It is possible to use fractals as contrarian signals to avoid the dangers of overtrading. By the time a fractal has appeared, an arrow will have appeared on top of the candlestick on the chart to which the indicator has been applied. It will stay in place until the highs are broken in the case of a bearish fractal or the lows are broken in the case of a bullish fractal. In order to be useful as a contrarian indicator, by the time a fractal has been invalidated, a trader should place a trade in the opposite direction i.e. following a bullish fractal when the market reverses and takes the lows, a trader should execute a put option with a larger investment than their original one as the previous fractal has been shown to be a fake move. Fractals are very visible on the charts and this is one reason for them being one of the most attractive indicators in binary options trading, however the fact that the indicator changes regularly through “repainting” makes it hard to make any trading decision that is based on it.
Other indicators that fall into the same category are the zigzag indicator that basically it is starting to draw a line from a high and then that line is staying on the screen until market is reversing and breaks the previous high. But, like in the case of the fractal indicator, the zigzag or the line will simply vanish in front of the new price action and all analysis that was considered valid is invalidated.
Expiry Dates and Fractals
Indicators which are repainting, like fractals are difficult to use without integrating them with another indicator or system. One way of doing this is to use fractals with another oscillators and divergences. For example, if the Relative Strength Index shows a divergence from the asset price, a divergence is appearing and this should be traded. An ideal striking price can be found by waiting until the fractal appears as the potential bottom following a bearish move or potential top after a bullish move.
The expiry date to use will depend on the time frame on which the indicator is being used and also on the kind of fractal in use i.e. the period which are being taken into consideration. The larger the time frame, the bigger the expiry date to use.
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