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The concept of Fractals was discussed by Bill M. Williams, PhD in his book "Trading with Chaos". According to Williams, an "up fractal" is defined as a middle bar with two lower highs on each side of it. A "down fractal" is defined as a middle bar with two higher lows on each side of it.
Interpretation
Bill Williams' book "Trading Chaos" described some basic (and advanced) concepts for trading using fractals as part of a larger, more inclusive Chaos-based trading methodology.
One simple method of utilizing fractals to initiate tades is to take trade based on the direction of a price breakout above/below the most recent fractal. If price breaks above the most recent UpFractal - enter long; If price breaks below the most recent DownFractal - enter short. Protective stops should be placed below the lowest low of the most recent Down Fractal or 2nd most recent DownFractal for long trades and above the highest high of the most recent UpFractal or 2nd most recent UpFractal for short trades.
For a full, detailed description of Bill Williams' Chaos trading methods, please refer to "Trading Chaos: Applying Expert Techniques to Maximize Your Profits" by Bill M. Williams, PhD (Wiley - 1995).
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