ActiveTrader 2013-10 | Fractal Breakout by Cone

This strategy was featured in the October 2013 issue of Active Trader magazine. 

System Concept:

A YouTube video called "Fractal Breakout Strategy by Bill Williams" demonstrated a dual-timeframe forex system based on methods proposed by Bill Williams decades ago. The two-part video walks through a cherry-picked trade in the Euro/U.S. dollar (EUR/USD), but the approach seemed promising enough to investigate in the Trading System Lab. Frankly, due to the results of our testing I don't recommend this strategy, and its details are left to those who voluntarily want to follow Bill Williams.

Generally, a fractal buy (sell) signal occurs when the following conditions are met:
1. The market exceeds the previous Up (Down) fractal,
2. The market is trading above (below) the "red alligator line" line for condition 1.

Long Entry rules: (Short rules are the opposite)

  • Wait for a close above the most recent up fractal on the daily scale. If the four-hour closing price is above the daily timeframe red alligator line, place a stop order to go long one lot on the next four-hour bar one pip (tick) above the current bar's high. (If the four-hour closing price is under the daily timeframe red alligator line, the fractal is not traded.)
  • If the stop has been raised above the initial position's entry price (see exit rules), add one lot for each breakout above four-hour bar Up fractals using the same "close-above/ buy-at-stop" technique.

Exit rules (Long): (Short rules are the opposite)

  • Place an initial stop at the nearest four-hour Down fractal that is below the red alligator line.
  • Raise the stop to the nearest Down fractal that forms above the initial position's entry price. The same stop is used for all pyramid positions.
  • After the stop has been raised at least once, exit all positions if five down fractals form without adding a new long position (momentum in the trade direction is assumed to have faded).

The Figure offers a good example of what the system attempts to do. The center of fractal patterns are annotated by the caret symbols. After being stopped out for a loss on a long trade, price closes below the daily sell fractal. A short position is immediately entered on the next bar, and the initial stop provides plenty of breathing room for the shakeout that occurs three days later. Stops are gradually lowered with new intraday buy fractals. More trade lots are added as the momentum continues to build until the inevitable bounce through a buy fractal covers the four lots for a total gain of more than 850 ticks.

Strategy Parameters: N/A

Author: Cone
Category: Chart Patterns
Creation Date: 4/5/2014
Licence: Freeware
Availability: Globally
Instructions for Script Download
  1. In Wealth-Lab client software, open the Strategy Explorer (Ctrl+O)
  2. Click the "Download..." button
  3. Click "Begin Download"