Alligator trading strategy
A Trader's Guide to Using Fractals By Justin Kuepper Updated March 15, — 6: In fact, one of the most prominent investing books out alligator is "A Random Walk Down Wall Street" by Burton G. Malkiel, who argues that throwing darts at a dartboard is likely to yield results similar to those achieved by a fund manager and Malkiel does have many valid points. However, many others argue that although prices may appear to be random, they do in fact follow a pattern in the form of trends. One of the most basic ways in which traders can determine such trends is through the use of fractals. Fractals essentially break down larger trends into extremely simple trading predictable reversal patterns. This article will explain what fractals are and how you might apply them to your trading to enhance your profits. When many people think of fractals in the mathematical sense, they think of chaos theory and abstract mathematics. While these concepts do apply to the market it being a nonlinear, dynamic systemmost traders refer to fractals in a more literal sense. That is, as recurring patterns that can predict reversals among larger, more chaotic price movements. These basic fractals are composed of five or more bars. The rules for identifying fractals are as follows: A bearish turning point occurs when there is a pattern with the highest high in the middle and two lower highs on each side. A bullish turning point occurs when there is a pattern with the lowest low in the middle and two higher lows on each side. The fractals shown in Figure 1 are two examples of perfect patterns. Note that many other less perfect patterns can occur, but the basic pattern should remain intact for the fractal to be valid. Figure 1 The obvious drawback here is that fractals are lagging indicators — that is, a fractal can't be drawn until we are two days into the reversal. While this alligator be true, most significant reversals last many more bars, so most of the trend will remain intact as we will see in the example below. Applying Strategy to Trading Like many trading indicatorsfractals are best used in conjunction with other indicators or forms of analysis. Perhaps the most common confirmation indicator used with fractals is the "Alligator indicator," a tool that is created by trading moving averages that factor in the use of fractal geometry. The standard trading states that all buy rules are only valid if below the "alligator's teeth" the center averageand all sell rules are only valid if above the alligator's teeth. Figure 2 is an example of such a setup: Figure 2 As you can see, the primary drawback to this system is the large swings that take place. Notice, strategy example, that the latest fractal had a drawdown of over pips and still has not hit an exit point. However, there are countless other techniques that can be applied in conjunction with fractals to produce profitable trading systems. Figure 3 shows a forex trading setup that uses a combination of fractals alligator time framesFibonacci -based moving averages placed at 89, and their inverses and a momentum indicator. Figure 3 Here is a basic rule setup that is used when using a chart with a four-hour time frame: Initiate a position when the price has hit the farthest Fibonacci band, but only after a daily Alligator fractal takes place. Exit a position after a daily D1 fractal reversal takes place. Notice how the fractals pinpoint meaningful tops and bottoms? This helps to take the guesswork out of deciding at which Fibonacci level to trade — all we have to do is check to see if the daily fractal occurred. We should also note that the trend strength began increasing at the sell fractal, and topped at the buy fractal. Although we lose some pips with the confirmation, it saves us from losing out on mere market noise — pips certainly isn't bad for three days! Things to Consider Here are a few things to remember when using fractals: They are lagging indicators. They are best used as confirmation indicators to help confirm that a reversal did take place. Real-time tops and bottoms can be surmised with other techniques. The longer the time period i. However, you should also remember that the longer the time period, the lower the number of signals generated. It is best to plot fractals in multiple time frames and use them in conjunction with one another. For example, only trade short-term fractals in the direction of the long-term ones. Along these same lines, long-term fractals are more reliable than short-term fractals. Always use fractals in conjunction with strategy indicators or systems. They work best as decision support tools, not as indicators on their own. The Bottom Line As you can see, fractals can be extremely powerful tools when used in conjunction with other indicators and techniques, especially when used to confirm reversals. The most common usage is with the "Alligator indicator"; however, there are other uses too, as we've seen here. Overall, fractals make excellent decision support tools for any trading method. Resources MetaTrader for forex TradeStation for equities via plug-in If you want to know more about chaos theory and strategy applications in the marketplace, an excellent book on the topic is "Profiting From Chaos" by Tonis Vaga.
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