The Fractal Guru Strategy – Too Confusing for Newbies?

To be honest I don’t really know what’s up with the name of the strategy and I usually walk away when I hear stuff like “Guru”, “Expert” or anything along those lines. Well, I decided to give the strategy a go and try it out on my Meta Trader 4 charts. The main reasons why I didn’t dismiss it from the start was because it uses ADX (I am sure you remember the article where ADX is thoroughly explained), Fractals (don’t worry, I will explain them here) and Japanese candlesticks. The strategy is created by a guy named Navin Prithyani and can be found here http://forex-strategies-revealed.com/basic/fractal-guru-strategy, but I will try to explain it in more detail. First, a few words about Fractals:

What are Fractals?

The Fractals used in trading are part of a strategy created by Bill Williams and are different from the Fractals used in mathematics. I am not going to explain them in full detail, because that is not necessary for this strategy, but what you need to know is that a bearish Fractal is actually a 5 candle formation and it is formed when the high of the middle candle is higher than the highs of the two candles to the left and the two on the right. A bullish Fractal is a five candle formation with the low of the middle candle being lower than the lows of the other four candles. Complicated? Here’s the picture:

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Above we have a bullish Fractal formation (a bearish one is an exact opposite) and although they might seem difficult to identify at first, let me assure you that it’s actually very simple. See that gray arrow below the middle candle? It will appear automatically whenever a Fractal is identified by the Fractal indicator…yes, there is an indicator that helps us. After all, it’s the third millennium so an indicator for Fractals is not such a complicated task.

The Meta Trader 4 platform has both Fractals and ADX indicators built-in, so you will easily find them by clicking on Insert – Indicators – Trend – Average Directional Movement Index (for the ADX) and Insert – Indicators – Bill Williams – Fractals to display Fractals on your charts. One thing you have to remember: the Fractal is a 5 candle formation so until the fifth candle is not closed, the arrow can disappear. Any trade will be entered on the opening of the third candle after the one where the Fractal appeared. Ok, enough about this, I don’t want to bore you so let’s get to the good part:

How To Use The “Fractal Guru Strategy” For FX, CFD, Crypto and BO Trading

The strategy relies heavily on the ADX and we only take bullish trades (Buy/Call) when the ADX is rising, the Green dotted line is above the Red dotted line and a complete Fractal appears (all 5 candles are closed). As an extra precaution, we only trade if the candle corresponding to the Fractal arrow has a long wick pointing towards the Fractal and a short wick on the other side. A picture will make things clearer:

The picture above explains a valid bullish trade entry according to the strategy and for a bearish trade, the opposite applies, except the ADX blue line: that must be rising, just like in the case of a bullish trade because it (the Blue line) shows the strength of a move, not its direction. Here’s a brief summary of both types of entries:

Bullish Trade Entry:

1. ADX Blue line is steadily RISING
2. The Green dotted line is ABOVE the Red dotted line
3. A bullish Fractal must be locked in/fixed/fully established (all 5 candles must be closed)
4. The candle corresponding to the Fractal arrow must have a long wick pointing towards the Fractal arrow and a short wick on the other side.
5. If you are trading Forex, CFD or Crypto, open a Buy trade
6. If you are trading BO, open a Call

Bearish Trade Entry:

1. ADX Blue line is steadily RISING
2. The Green dotted line is BELOW the Red dotted line
3. A bearish Fractal must be locked in/fixed/fully established (all 5 candles must be closed)
4. The candle corresponding to the Fractal arrow must have a long wick pointing towards the Fractal arrow and a short wick on the other side.
5. If you are trading Forex, CFD or Crypto, open a Sell trade
6. If you are trading BO, open a Put

Trade Management

For FX/CFD/Crypto trades you will have to choose a good placement for your Stop Loss and Take Profit orders but the good news is that it’s not such a difficult task. And because it’s a trend following strategy, you can use a tight Stop Loss, a few pips behind the Fractal, just make sure the trade has enough room to breathe. For Take Profit, use at least 1:2 Risk to Reward (RR) but you can go even higher in some cases. Keep in mind that cryptocurrencies are more volatile so you will have to use a wider Stop Loss but you can also get away with a bigger Take Profit.

For BO trades things are a bit more difficult because you will have to adjust your expiry according to the conditions of the market you are trading. If the trend is strong, use a short expiry of about 2 candles (that would be 10 minutes if you are trading a 5-minute chart). If the market is slow, use a longer expiry to allow the trade to develop. And always keep in mind this is just an opinion and you shouldn’t take it literally; always do your research and decide on your own.

Why Does The “Fractal Guru” Strategy Suck?

First of all, I think it is much too complicated for a newbie and he/she could easily get confused by all the ADX lines, the five candles of a Fractal or even the entry point that is the opening of the third candle after the Fractal arrow appears. Furthermore, I think that the ADX rule is too subjective and leaves a lot of room for interpretation. The exact words of the creator of the strategy are: “when the ADX is trending by seeing the blue line rising steadily…” I am not saying it is wrong, but what exactly does it mean? For how long should the ADX rise steadily and what values are considered safe in terms of this strategy? We don’t have a clear answer to that and all we could do is to speculate about it. Maybe a seasoned trader can easily identify a steadily rising ADX but a novice will be in trouble.

Why The “Fractal Guru” Strategy Doesn’t Suck?

Although it is a pretty complicated strategy, it is based on sound principles that can generate a high probability trade: we are trading with the trend as long as the ADX is rising and the Fractal formation is actually the retracement. This is the best place to join a trend: after the retracement. Then there’s the long wick rule: the candle with a long wick that the strategy talks about is something similar to a Pin bar (Pinocchio bar) which is a reversal candle. I will always like Pin bars because I’ve seen their power in action and the extra confirmation provided by them is beneficial for the strategy.

Wrapping it up

I like trend following strategies because they provide good and pretty safe entry points, but I don’t feel that the ADX is the best trend indicator. At least, not used as the main indicator in a strategy. Fractals are …too complicated for what they actually do and can be easily re-painted (re-painting occurs when an arrow appears and then disappears when the next candle is printed). Overall, the principle behind it is good, but the tools it uses are just too subjective and can confuse traders. My conclusion is that the individual trader who uses this strategy makes all the difference and it can be profitable for some traders while others will just thrash it and move on.