The Fractal indicator developed by Bill Williams is used to signal potential tops and bottoms within the short term. It is denoted by the up and down pointing arrows when there is a high or a low within the five bars.
The fractals indicator is especially useful when prices are trending. Because prices tend to make lower lows and lower highs during a downtrend, and higher highs and higher lows during an uptrend, the fractal indicator is used to identify the highs and lows within the price bars in relation to the trend.
The fractals indicator is commonly used with the Alligator indicator as it represents the strength of the trend depending on how the jaws/teeth/lips of the alligator are positioned. When the Alligator signals a downtrend with prices trading below the Jaws denoting a strong downtrend, sell positions can be opened as long as the fractals indicator plots lower highs. The position can then be closed once the fractals start to consistently produce higher highs. The opposite is true for up trends where a buy position is taken when price is above the Alligator and its jaws are wide. The confirmation comes from the fractals printing higher lows and higher highs. Once this starts to change, i.e.: the fractals start to print lower highs and lower lows it signals a weakening uptrend.
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