Fractal Breakout Strategy - by Bill Williams part 2

Summary

In this tutorial, Peter from Expert Trading UK explains the Fractal Breakout Strategy by Bill Williams. He guides viewers on identifying trade setups, emphasizing the importance of trading with the trend and avoiding counter-trend trades. Peter advises against trading on timeframes lower than the daily chart due to overwhelming signals. He also discusses entry and exit strategies, including waiting for confirmation after a fractal breaks and adjusting stop losses to manage long-term trades effectively, aiming for substantial pips.

Takeaways

• 📈 Trade with the trend: It's important to align trades with the existing trend rather than against it, as the trend is typically a trader's friend.
• 🚫 Avoid counter-trend trades: Do not enter trades that go against the clear trend, especially when the alligator indicator shows a strong directional move.
• 📊 Identify trendlines: A trendline is confirmed with three touches and breaking this line signifies a potential non-trade zone until a new fractal forms.
• 🚫 Do not trade below the daily chart: Fractals should not be traded on timeframes lower than the daily chart to avoid being overwhelmed by false signals.
• 📍 Wait for fractal confirmation: After a fractal is identified on the daily chart, wait for it to be confirmed on the 4-hour chart before considering a trade.
• 📉 Enter trades on bar closure: Wait for the bar to close below the fractal level for a down fractal trade, ensuring more confirmation and reducing false signals.
• 📈 Look for momentum penetration: After the bar closes below the fractal, wait for the next bar to take out the low of the previous bar, indicating momentum.
• 🔄 Manage trades with stop-loss: Set a stop loss at the nearest up fractal, preferably above the alligator line, to manage risk in long-term trades.
• 📉 Move stop-loss with consolidation: Adjust the stop-loss downward as the market consolidates and forms new fractals, locking in profits and managing risk.
• 📈 Add to position on fractal breaks: When the market breaks the low of a new fractal, consider adding to the position to increase potential profits.
• 🏁 Exit strategy with multiple fractals: Use discretion to exit trades after observing a series of fractals, typically four or five, to secure profits before a potential reversal.

Q & A

What is the main topic of the video script?

The main topic of the video script is the 'Fractal Breakout Strategy' by Bill Williams, focusing on how to determine trade setups and which fractal signals to follow.

Who is the presenter in the video script?

The presenter in the video script is Peter from Expert Trading.

What is a fractal in the context of the video?

In the context of the video, a fractal refers to a signal represented by an arrow (up arrow for an up fractal and down arrow for a down fractal) used in the Fractal Breakout Strategy.

Why should one avoid trading against the trend according to the video?

According to the video, one should avoid trading against the trend because it can lead to false signals and losses, as the trend is considered your friend in trading.

What is the significance of the red alligator line in the strategy?

The red alligator line is significant as it represents a trend indicator; one should not enter a trade that is counter to the trend indicated by this line.

What constitutes a trendline in the context of the strategy?

A trendline in the context of the strategy is formed by three touches on a chart, and a break of this trendline indicates a potential point to avoid taking trades.

Why is it recommended to wait for confirmation before entering a trade?

It is recommended to wait for confirmation before entering a trade to avoid false signals and to ensure that the market is indeed moving in the direction indicated by the fractal signal.

What is the recommended timeframe for trading fractals as per the video?

The video recommends not trading fractals on a timeframe lower than the daily chart to avoid being overwhelmed by the number of signals.

How should one manage a fractal trade according to the video?

One should manage a fractal trade by entering it on the daily chart and managing it on the 4-hour chart, waiting for the price to break and close below the fractal level.

What is the general rule for placing a stop loss in this strategy?

The general rule for placing a stop loss is to put it at the nearest up fractal, ensuring it is above the alligator line.

When should one consider exiting a trade according to the video?

One should consider exiting a trade after about four or five up fractals have formed, indicating a potential end to the downward push in the market.

Outlines

00:00

📈 Trading with Fractals: Avoiding Counter-Trend Mistakes

In this segment, Peter from Expert Trading introduces viewers to the Fractal Breakout Strategy by Bill Williams, focusing on identifying trade setups and the importance of trading with the trend. He explains that one should not be overwhelmed by the number of fractal signals and emphasizes the importance of not trading against a clear downtrend. Using the alligator indicator as a reference, Peter advises against entering a trade that breaks the red alligator line unless it aligns with the overall trend. He also discusses the concept of a trendline, which is defined by three touches, and suggests waiting for confirmation on the daily chart before managing trades on the 4-hour chart to avoid false signals.

05:02

📉 Advanced Fractal Trading Techniques for Forex

This paragraph delves deeper into the intricacies of trading with fractals in the Forex market, where billions of dollars can create false signals. Peter explains the need for confirmation beyond the fractal level, such as waiting for the 4-hour chart to close below the fractal before considering a trade. He advises placing a sell order and waiting for the market to validate the trade by taking out the low of the fractal level. The stop loss is strategically placed above the nearest up fractal and above the alligator line, aiming for long-term trades with the potential of hundreds of pips. Peter also discusses the strategy of moving the stop loss and adding to the position when the market consolidates, as well as the importance of exiting a trade after a series of up fractals to secure profits and manage risk effectively.

Keywords

💡Fractal Breakout Strategy

The Fractal Breakout Strategy is a trading technique developed by Bill Williams, which focuses on identifying and trading fractals, or patterns that repeat themselves in the market. In the video, this strategy is the central theme, with the speaker, Peter, providing an in-depth explanation of how to apply it in practice, including how to discern trade setups and the importance of trading with the trend.

💡Fractals

Fractals in trading refer to small, five-bar patterns that can be used to predict future price movements. In the script, Peter explains that fractals are indicated by arrows, with up arrows representing potential upward movements and down arrows indicating potential downward movements. The video discusses how to interpret these signals and when to act on them.

💡Alligator Line

The Alligator Line is a part of the fractal breakout strategy and is a moving average indicator that helps traders identify the market's trend direction. In the video, Peter mentions that the speaker should not enter a trade if the fractal is above the red Alligator Line, as it indicates a downtrend and would be counter to the prevailing trend.

💡Trade Setup

A trade setup is a specific condition or pattern in the market that signals a potential opportunity for a trade. In the context of the video, Peter discusses how to determine a trade setup using fractals, emphasizing the importance of trading with the trend and avoiding counter-trend trades.

💡Trend

The trend refers to the general direction in which the price of an asset is moving. In the video, Peter stresses the importance of trading with the trend, as it is considered a trader's friend. He provides examples from the script where ignoring the trend can lead to poor trade decisions.

💡Trendline

A trendline is a line drawn on a chart to represent the direction of a trend, typically connecting at least three points. In the script, Peter describes how a trendline is formed and how it should be used to determine whether to enter a trade, with a break of the trendline indicating a potential change in trend.

💡Daily Chart

The daily chart in trading represents the price action of an asset over each trading day. Peter emphasizes in the video that traders should not trade fractals on a time frame lower than the daily chart due to the overwhelming number of signals that can be received on shorter time frames.

💡4-Hour Chart

The 4-hour chart is a time frame that traders can use to manage their trades. In the script, Peter suggests using the 4-hour chart to manage trades initiated from the daily chart fractals, providing a balance between long-term trend analysis and short-term trade management.

💡Stop Loss

A stop loss is an order placed with a broker to sell a security when it reaches a certain price, aiming to limit an investor's loss on a position. In the video, Peter explains the importance of setting a stop loss at the nearest up fractal above the Alligator Line to manage risk effectively.

💡Pips

Pips are the smallest price movement recorded in the forex market, equivalent to a change of 0.0001 in the exchange rate. In the script, Peter uses the term 'pips' to describe the potential profit in trades, with the goal of making hundreds of pips on each trade.

💡Exit Strategy

An exit strategy in trading is a plan for closing out a position to realize a profit or limit a loss. Peter discusses in the video the importance of having an exit strategy, such as exiting after a certain number of up fractals, to secure profits and avoid potential losses.

Highlights

Introduction to part two of the fractal breakout strategy by Bill Williams.

Peter from Expert Trading provides guidance on determining trade setups and directions.

Explanation of fractal signals and the importance of choosing the right fractal to trade.

Avoiding trades during clear downtrends and the importance of trading with the trend.

How to identify a trendline with three touches and the significance of trendline breaks.

Advice against taking trades immediately after a fractal breaks the red alligator line.

The concept of waiting for a fractal to form completely below the alligator for a downtrend trade.

Emphasis on not trading fractals on a time frame lower than the daily chart to avoid false signals.

The strategy of managing trades on the 4-hour chart after a fractal forms on the daily chart.

Waiting for a bar to close below the fractal before considering a trade entry.

The importance of penetration and confirmation of momentum for trade entry.

Setting a sell order after the 4-hour chart closes and waiting for the next bar to take out the low.

General rule for placing a stop loss at the nearest up fractal above the alligator.

Long-term trade strategy aiming for at least 300-400 pips.

Moving the stop loss and adding to the position after a new down fractal forms.

Exiting a trade after observing four or five up fractals to secure profits.

The necessity of discretion in exit strategies and managing risk with strict stop-loss rules.

Example of a trade that resulted in approximately 600 pips following the outlined rules.

Transcripts

hello guys welcome to part two of the

fractal breakout strategy by Bill

Williams I'm Peter from expert trading

docker at UK and I'm going to walk you

through a few trades and how you would

determine a trade setup in which

direction to take it because a lot of

time with the fractals you might be

overwhelmed by the amount of fractal

signals you see a fractal or one of the

oh one of these arrows an up arrow is a

up fractal or down arrow is a down

fractal and which one do you take you

take the up one do you take the down one

which break do you take so what we're

going to do is we're going to take you

through a few trades so let me show you

when not to take a trade well a clear

time not to take a trade is when there

is a clear downtrend so what we've got

here if we move over to here because you

can see this where my mouse is now this

is an up fractal and it is broken above

this red line the red alligator line now

it's been broken so technically

according to the Bill Williams book you

should enter that trade you should enter

it here but then it only goes up a

little bit and then really plummets down

now the way to avoid this it's just not

to enter the trade you do not enter a

trade which is counter-trend always

trade with the trend the trend is your

friend you must have heard that the

trend is your friend but not all the

time

okay in this case it is your friend

right so we've got is we've got a

trendline here alright what constitutes

a trendline it's three touches 1 2 3 and

then when it breaks this trendline right

we don't take a trade we don't take an

up trade we don't take a down trade we

don't take any trades at all right until

another fractal forms below the

alligator so completely below it the

book says when it for when it breaks

below the red alligator line but we say

no we don't we don't want that ok so

let's just get rid of this line so you

can see more clearly right so what we're

going to do is we're going to take this

example so we don't take this fractal

we'll take this one

so when do we take it right so we're in

a downtrend okay you can see here it is

a downtrend

and it's below its company fractals

completely below the alligator alright

so here's the fractal so according to

the Bill Williams book you have to put

it five points or five pips below the

actual fractal formation right we don't

think you should do that which think you

should wait for another sort of

confirmation and we actually just should

think that you wait for the daily chart

to form the fractal and then you manage

it on the 4-hour chart and this is

essential never trade fractals on a time

frame lower than the daily chart okay

we don't recommend it because you'll get

overwhelmed by the the number of full

signals that you get okay so here's a

fractal and there is where we want it we

want it on one point six oh six five now

let's go over to the 4-hour chart okay

and let's see where that is so that's

back here right so that's over here over

here here it is alright so this is the

fractal we saw one point six oh five

three rounded by that level six zero six

five and this is where the fractal is

formed now the only time so let's add

this here so this one what we want to

enter here right so that is the daily

fractal and we manage it on the 4-hour

chart so when it breaks the fractal

which it does it breaks it on this bar

here with a horizontal line of the

crosses it breaks it on that line okay

now when it breaks it we don't enter the

trade we wait for the bar to close below

the fractal if it doesn't go briolette

close below the fractal we've got no

trade even though it's signal this would

save you a whole load of false signals

and false trades you want to wait till

that candle sorry not a nor candle till

the bar closes below the fractal let's

zoom in here

and go down to where the fretful is

right so let's just see here it is yeah

right so we want to wait for it to close

below so it has closed below so here it

closes below and we say okay cool we

enter the trade now no no you don't you

don't into the trade so it's closed

below but we want more confirmation than

that what you need is you need a

penetration and then confirmation of

momentum so once this bar closed below

you're going to wait for the next bar to

take out the low of this bar so I know

what you're thinking oh this is

confusing but it's essential this is

another thing that will endure that will

save you that will save you a lot of bad

trades because the forex market is so

big because they're trading about three

trillion a day I mean last year there

was what there were one or two days when

I went out to a trillion turnover in one

day when you get a push for a trend it's

a push of billions and hundreds of

billions of dollars into a direction so

you get a lot of false signals it has to

go up like a wave and then come down

right so therefore you need the

confirmation the penetration right and

the clothes below this level this

fractal level on which is from the daily

chart this is the 4-hour chart remember

because it's where we're managing the

trade and once it closes you're waiting

for the next bar to take out that low so

what you can do is once the 4-hour chart

has closed there you can actually put a

sell order in to go in here and then

what you do is you just wait you just

wait for it to take down that low so

where do we put our stop loss general

rule that we normally use is put your

stop loss at the nearest up fractal so

what we want is we like to also put it

above for the alligator so here's the

nearest up fractal and it's above the

alligator so we will put our stop loss

here it's quite a long fast stop but

these are long-term trade so you're

looking for a lot of pips you're looking

for about you know at least three four

hundred pips on these trades

okay so then what happens you go down

and it goes down here forms another down

fractal and then goes back up and forms

another up fractal cut these couple of

up fractals are just completely invalid

because it moves down and into

consolidation and it goes up here so

what this offers us is an opportunity to

move our stop once this moves down so

what you do you'd move your stop loss

from up here to down here it's still

above the alligator and then down here

you can add because this is a down

fractal you can add to your position you

can enter the trade

again so add to your position and then

what we're waiting for is we're waiting

for it to break the low of this new

fractal that has been formed break the

low it's sort of did it on that one it

generally did it on this one and then

took it out so we'll enter the trade

down here move your stop loss to up here

and then wait for the trade to make its

move and then it goes down to here and

then generally if we say if we see I

don't know about four or five up

fractals after we see about four or five

up fractals before moves ended we tend

to exit the trade and because you know

we don't want to stay in here forever

because it could move back up and all

our hard-earned pips could be lost so

over here I mean on this first trade you

would have made what is that

one 666 if you exited around here you

know see that's that's 400 400 and

something pips and then add to that from

here to there

that's another 200 and something pips

are all together in this move you would

have made about 600 pips if you adhere

to our rule so I mean you need to use a

little bit discretion on the exit here

the stop-loss there are very strict

rules for the stop-loss and managing

your risk but over here you need to

ensure that after about four maybe five

up fractals before you really see a

downward push exit the trade take your

profit or make your stop extremely tight

so here's one example for a trade

and I hope you learn something out of

that