The Fractal Guru Strategy

It came as a great confusion for me as why this strategy has a word “Guru” in its name. Normally anything coming with “Guru”, “Professional”, “Expert” or anything fancy like that makes me feel more skeptical than attracted. However, this strategy has something special in it, so I did give it a try using my Meta Trader 4 charts. It was created by NavinPrithyani and here is the link for the strategy http://forex-strategies-revealed.com/basic/fractal-guru-strategy. One reason this strategy has drawn my attention was that it utilized ADX (you can check out the article about ADX posted not long ago), Japanese candlesticks and Fractals (which will be explained in this article).

What are Fractals?

In trading, the term Fractals is different from that used in mathematics. It is part of a strategy created by Bill William, which I will not be elucidating in this article as it is obviously unnecessary. What you are advised to understand here is that a bullish Fractal is the formation of five candles in which the low of the middle candle is lower than the lows of the other four candles in the formation. Conversely, a bearish Fractal is the formation of five candles in which the high of the middle candle is higher than the highs of the other four candles. If you feel that these words confuse you, let’s view an illustration:

The Fractal Guru Strategy 01

The illustration above shows us what a bullish Fractal formation of five candles looks like (and we will have a bearish Fractal if we reverse this picture). Identifying a Fractal may seem a bit difficult at first, but it is actually very easy and simple if you just focus on the grey arrow at the bottom of the middle candle, which illustrates a Fractal identified by the Fractal indicator. Fractal indicator is a tool designed to help to identify Fractals quickly and accurately. In such a modern world, Fractal indicator is not something very strange or extraordinary, so having one is easy and very useful.

Both ADX and Fractals indicators are integrated in the Meta Trader 4 platform, so if you want the Fractals to appear on your charts, just click: Insert – Indicators – Bill Williams – Fractals for the Fractals and Insert – Indicators – Trend – Average Directional Movement Index for the ADX. You need to bear in your mind that the grey arrow can disappear until the fifth candle isn’t closed, simply because Fractal is the formation of five candles. Trades will be entered upon the opening of the third candle following where the Fractal is manifested. These words may seem a bit boring and confusing, so let’s get to the exciting part of this strategy:

How to use the “Fractal Guru Strategy”

This Fractal strategy depends greatly upon the ADX and Calls are only taken when the ADX is on the rise, the Red dotted line is below the Green dotted line and a complete Fractal is manifested (all five candles are closed). Just to be more cautious in this strategy, we decide trades are only entered when the candle matching with the grey Fractal arrow has a long wick on the side of the grey arrow and a short wick on the other side. This illustration will help you have a clearer idea of this strategy:

The Fractal Guru Strategy 02

The above picture illustrates what a valid Call entry looks like in accordance with this strategy. For a Put, everything must be reversed, with the exception of the ADX blue line that must be on a rise just the same as in the case of a Call. This is because the Blue line of ADX displays the strength of a move instead of its direction. Let’s look at a brief summary of both Put and Call entries:

Call Entry:

  1. bullish Fractal must be fixed/locked in/fully established (all 5 candles are closed)
  2. ADX Blue line is steadily RISING
  3. The candle matching with the grey Fractal arrow must have a long wick pointing towards the Fractal arrow and a short wick point to the other side
  4. The Red dotted line is BELOW the Green dotted line

Put Entry:

  1. bearish Fractal must be fixed/locked in/fully established (all 5 candles are closed)
  2. ADX Blue line is steadily RISING
  3. The candle matching with the grey Fractal arrow must have a long wick pointing towards the Fractal arrow and a short wick point to the other side
  4. The Red dotted line is ABOVE the Green dotted line

Disadvantages

The first bad thing about this strategy is that it is very difficult to follow. If you are a beginner in this field, you must feel so confused and baffled with all the rules, ADX lines, formation of five candles, etc. The explanation for the opening entry point of the third candle after the grey Fractal arrow appears is also pretty confusing. The rules are also ambiguous and traders can make lots of interpretation from their contents. For example, “when the ADX is trending by seeing the blue line rising steadily…” This is the original wording of the strategy as in its creation document, so what does this sentence refer to? How long should the ADX go on the steady rise and which values are deemed safe for the strategy? The strategy explanation doesn’t give us clear answers, so the best we could do is to make interpretation from what it says. Perhaps, this strategy is for advanced traders who know how to spot a steadily rising ADX easily. A beginner will meet great difficulties.

Advantages

Despite its complication, the strategy is built based on strong principles generating trades with high probability. This means we are making trades with the trend as soon as the ADX is on a rise and the Fractal formation is in fact the retracement. And the best place a join a trend is none other than after the retracement. In addition, we have the long wick rule: the candle having a long wick mentioned in this strategy bears much resemblance to a Pinocchio bar (a Pin bar) that is a reversal candle. The Pin bars have always stayed amongst my favorites as they have displayed their effectiveness in real practice. Their extra confirmation also brings benefits to the strategy.

Conclusion

Trend following strategies have always been my preferred ones since they create high-quality and safe entry points. However, personally I don’t consider the ADX as the best indicator for trend, or at least it is not utilized as a main indicator of a strategy. Fractals are just too difficult to follow and their complication well exceeds their actual performance and power. They can also be re-painted easily, which means an arrow appears and then disappears when the next candle is printed. In general, the principle of the strategy is great, but what it shows in real practice is simply too subjective and very confusing. In conclusion, it is the traders who use this strategy that make all the differences. It can bring profits to some traders, while only losses and confusion to many others.

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Author: David Wilson