Fractal Adaptive Moving Average Indicator For MT4
The Fractal Adaptive Moving Average Indicator For MT4 is a modified version of John Ehlers’s original indicator. It serves as an alternative to the default fractals that come pre-loaded with MT4. The Fractal Adaptive Moving Average Indicator For MT4 (FRAMA) uses the fractal nature of financial markets to dynamically adjust its smoothing period.
What Are Fractals?
Fractals are geometric curves or patterns, which when broken into parts, continue to display the same characteristics as the larger curve or the pattern. Fractals occur commonly in nature, and can also be used profitably for financial trading.
Fractals help break down broader market trends into predictable and profitable reversal signals. A fractal pattern is made up of five or more candles, and shows where prices have struggled to edge higher (up fractal), or lower (down fractal).
The basic rules for spotting fractals are stated below:
• An up fractal is a bearish turning point, which occurs when a candle in any time frame is surrounded by at least two bars to the right and two bars to the left with corresponding lower highs.
• A down fractal is bullish reversal signal where a candle has two higher highs on either of its two sides.
How to Calculate Fractal Adaptive Moving Average Indicator For MT4?
The Fractal Adaptive Moving Average Indicator For MT4 is calculated based on the algorithm of the exponential moving average, in which the smoothing factor is arrived at by taking in to consideration the fractal dimension of the price series under consideration.
FRAMA(t) = A(t) * Price(t) + (1 - A(t)) * FRAMA(t-1)
FRAMA(t) = Current Value of FRAMA;
Price(t) = Current Price;
FRAMA(t-1) = Previous Value of FRAMA;
A(t) = exponential smoothing factor.
Exponential smoothing factor is arrived at using the below given formula:
A(t) = EXP(-4.6 * (D(t) - 1))
D(t) = Current Fractal Dimension;
EXP = Mathematical Exponent Function.
How to Trade Using Fractal Adaptive Moving Average Indicator For MT4
All types of analysis used for conventional moving averages can be applied to Fractal Adaptive Moving Average Indicator For MT4.
1. Price crossing above or below FRAMA is indicative of directional change. But traders need to remember that just like any other moving average, a simple crossover strategy is prone to generate false signals. This can be greatly reduced by incorporating a price filter or a time filter to the crossover signals.
2. The direction of Fractal Adaptive Moving Average Indicator For MT4 can define the broad trend of a market. If FRAMA is rising and plotting higher highs, the trend is up. Conversely, when FRAMA is falling, the bias is bearish.
3. Finally, traders can combine a longer term FRAMA and a shorter term FRAMA to create a robust trading system. The long term moving average can define the overall trend. Traders can then trade in the direction of that trend using the shorter Fractal Adaptive Moving Average Indicator For MT4.
When price moves are relatively small, the Fractal Adaptive Moving Average Indicator For MT4 closely follows price. But when the swings widen, FRAMA follows price from a further distance. This trend following indicator can be effectively used to locate market turning points and filter the noise out of price movements. The main advantage of FRAMA over the commonly used moving averages is that it moves very slowly when markets are sideways but quickly shifts gears when prices start to trend.