Have you ever wondered about the people behind some of the most effective trading tools and strategies? Because while the majority simply follows in the footsteps, someone paves the road. Bill Williams trader, author and psychologist was one of the market experts who managed to see patterns in the seemingly chaotic price movement and turned them to his benefit. Today we are talking about the idea of trading chaos by Bill Williams.
Bill Williams Trader Story
Bill Williams, the trader, was born in 1939 and is widely known as a visionary and forefather for modern day trading psychology. Williams achieved tremendous levels of success in commodity, stock and Forex markets. On top of that, he became a visionary and the forefather for modern trading psychology, which ended up leading hundreds of traders to noteworthy success.
However, it is also worth pointing out that Bill Williams trading career mostly took place in the 80s, which means that there is a need for a fresh perspective when it comes to consideration of his strategies. For starters, online trading wasn’t even remotely a thing, back in the late twentieth century. Unlike today, only a select category of people were able to gain access to the market and profit off it.
So, it makes complete sense that although Williams’s ways of trading were very much effective, today they need to be looked at from a different approach. But before we go into the technicalities of implementing Bill Williams chaos trading indicators, let’s first take a look at the foundation of the theory.
Bill Williams Chaos Trading Theory
The philosophy described in Trading Chaos by Bill Williams, a book originally published in 2004, is a combination of psychology and fractal geometry. Williams was a known critique of established analytical techniques. In his own words, technical and fundamental analysis strategies used back in his day, lacked objectiveness. This inspired him to apply some of his beyond financial knowledge and find specific patterns in virtually sporadic movement of the price.
At first, the biggest advertisement behind the trading chaos Bill Williams brought into the world wasn’t the precise math, but the author’s own results. In less than two years Williams has grown his initial investment of ten thousand dollars into two hundred thousand. Needless to say, this has attracted the attention of many traders across the market.
The biggest obstacle on the way of traders who got inspired by Bill Williams trading solutions was their lack of theoretical knowledge. Which led Williams into establishing Profitunity Trading Group, an educational organization that taught traders to correctly implement the system and indicators developed by Williams. After the founders passing in 2019, Profitunity is now led by his daughter, Justine Williams-Lara.
After doing some research, we have managed to gather some information on how the Bill Williams trader philosophy applied by traders today. Below you will find the idea behind the overall method as well as helpful tips on using each particular indicator in your trading process.
Bill Williams Trading System
Bill Williams chaos trading vision originated from his belief that traditional fundamental and technical analysis will never lead to consistent results. Markets, such as Forex, are nonlinear and dynamic, which means that the way we analyze them has to be multidimensional. The dimensions, described by Williams, include: fractal, momentum, acceleration and deceleration, zone and balance line. We will circle back to each of these concepts further on, when we get into describing the technical indicators.
In addition to his purely mathematical outlook, Bill Williams trader philosophy also deserves a portion of our attention. Williams believed that trading is primarily a process of knowing and realizing yourself. Understanding what kind of trader you are early in the process is capable of giving you an advantage of seeding out the useless data and constantly keeping your focus. And as long as you combine the knowledge of your own nature with the knowledge of the market's structure, you will become unbeatable.
So, just before you dive into the vast ocean of highly complex Forex trading strategies, start simple and figure out the most comfortable way for you to fit into the world of currency trading. Evaluate your stress-resistance levels, as well as the amount of time and energy you will have available for trading. Based on this evaluation, concentrate on learning about solutions that suit your style, rather than just going with the crowd and trying every available method out there.
Now, it is time to take a closer look at the indicators suggested by Bill Williams trading system. Take your time and get to know each of them in close detail, before going into using them during trading.
Bill Williams Trading Indicators
Trading indicators are helpful little helpers of any trader out there. Depending on your requirements, different indicators are capable of measuring and predicting trends, volatility, momentum and volume. These pieces of data can ultimately decide on the trader’s next move and even assist with laying out an entire trading plan for several sessions to come.
As mentioned before, Bill Williams chaos trading indicators were designed to look at the market from the perspective of multiple dimensions, such as space, energy, force and strange attractors. The space, or in other words the location, is tackled with the Fractals indicator, which is the key to an entire system. However, other components are also highly important, starting with the pair of Alligator indicator and Gator oscillator.
Williams himself referred to the Alligator indicator as the compass that helps a trader remain moving in the same direction. This indicator works mostly by helping to see the actual trends and avoid trading within a range, which according to Bill Williams, significantly minimize your losses.
If you’re familiar with the Bollinger Bands indicator, for instance, the Alligator might appear very familiar. It consists of three Moving Averages (MAs): blue, red and green, also referred to as jaw, teeth and lips respectively in professional trading circles. The nicknames’ main purpose is to avoid confusion, as traders can adjust color settings of any indicator according to their preference.
So, the blue jaw of the Alligator is a 13 period MA, offset 8 bars into the future. The red teeth line is an 8 period MA, offset 5 bars into the future. And the green lips line is a 5 period MA, offset 2 bars into the future.
When the three lines are tightly located and intertwined the Alligator is considered asleep, which in traditional trading lingo translates to range-bound. According to trading chaos Bill Williams theory, the longer the Alligator sleeps, the hungrier it will get, meaning that the leap out of the range can be rather significant. The traders are suggested to stay put, when the Alligator sleeps, then actively trade during its time awake and lock profits soon after it goes back to sleep.
From the location of this indicator’s balance lines we can determine whether the market is uptrending or downtrending. During an uptrend, the lines will position below the price movement and the opposite way round during a downtrend.
Using all of this information, the trader will have a good idea of when to activate. And in order to make this decision-making even more effortless, there is an oscillator that builds off the Alligator, called Gator.
The Gator oscillator is an assisting trading chaos tool, which displays the convergence/divergence of the balance lines of the Alligator. The oscillator consists of two histograms located at the bottom of the chart. The histogram above the zero line expresses the connection between the jaw and teeth, while the histogram below zero stands for the relationship between teeth and lips.
To assist the traders even further, each bar of the histogram is color coded. That way, if the bar is higher than the preceding one, it will appear green and if it was lower, it’ll be red. As Gator clearly shows the convergence and intertwisting of the Alligator’s lines during both awake and asleep states, it helps to accurately identify the trend and structure your upcoming moves according to it.
While Alligator and Gator generally call for action, Fractals are there to point out specific parts of the chart that deserve trader’s attention. Specific fractal configurations are read as trading signals. In fact, Williams advised not to even consider trading before the first fractal is triggered.
On the chart fractals can appear as arrows, dots or lines, depending on your setting. They can also be color-coded to represent buy and sell signals. But even without relying on the design, you will have no trouble reading the fractals as trade signals. A buy fractal is a set of five consecutive bars (or candles), with the highest high preceded by two lower highs as well as followed by two lower highs. And the sell fractal will be the lowest low, preceded by two higher lows and followed by two higher lows. It is important to note that both types of fractals can share bars. The signals generated by fractals can be:
When a buy fractal is located above the red line, Buy Stop is placed one tick above the high of the upward fractal.
When a sell fractal is located below the red line, a Sell Stop is placed one tick below that fractal.
Logically: you don’t buy if the fractal is below the teeth and don’t sell if it’s above.
Fractals considered valid until they are either triggered or followed up by a new fractal in the same direction. In the second scenario the original fractal is ignored and the pending order based on it — deleted. Additionally, if the fractals keep forming in the direction with your original position, you can feel free to add up to it.
Awesome oscillator (AO)
Awesome oscillator (AO) is a momentum measuring tool that represents the difference between a 5 period MA and a 34 period MA. That way the current momentum of the last 5 bars is compared to the preceding 34 bars. The AO is displayed as a histogram at the bottom of the chart, with green and red bars. Greens appear when they’re higher than the bar before them and reds appear when they’re lower.
Although the Awesome oscillator is capable of generating three buy and three sell signals, those are ignored unless a fractal is triggered outside the Alligator’s balance lines. However, there are still strategies that are based on the AO tool, such as the Awesome Oscillator Saucer buy signal or Awesome Oscillator Twin Peaks.
Acceleration and deceleration oscillator (AC)
In accordance to the idea of trading chaos by Bill Williams, before the price changes we see a shift in momentum. But even before the momentum, there is a change in acceleration. This serves as the foundation for the Acceleration and deceleration oscillator (AC).
AC works by determining the difference between the 5/34 momentum histogram on the Awesome Oscillator and the simple 5 period MA on the Awesome Oscillator. Unlike most oscillators, including the AO, when the Acceleration and deceleration oscillator crosses its zero line it is not considered a valid signal. The rest of the rules remains the same: don’t buy if the histogram is red and don’t sell if it’s green.
Market facilitation index (BW MFI)
The market facilitation index (BW MFI) looks at the significance of the price change for every unit of volume. BW MFI can generate a number of valuable signals. For example, when the market facilitation index rises at the same time as the volume, it is a good indicator that the interest is growing and it is a good time to be on the market already. On the other hand, when the BW MFI decreases along with volume, the interest is fading and the ongoing trend is very likely to end soon.
And then when the market facilitation index doesn’t agree with the volume it carries a whole new meaning. This way, when BW MFI is pointing upward by the volume is decreasing, it means that although the market is still moving in the same direction, there are no fresh participants to back it up. This ultimately means that the major driving power behind the movement is speculation.
In the opposite scenario, when the market facilitation index is pointing down, but the volume rises it indicates a battle between bulls and bears, with their forces nearly equal. On the chart it looks a lot like a range-bound market, which we already know usually breaks out in a rapid and powerful motion in the opposite direction. It is crucial to spot the exact direction of the breakout in order to build a successful strategy for your upcoming moves.
Exiting According to Bill Williams Trading Indicators
Finally, in terms of wrapping up your trades, the main advice within the chaos trading approach is to close your position when the price closes beyond the red line under the conditions of a trending market. Additionally, the Bill Williams trading system offers several solutions on setting up a Stop Loss order. For instance, in the volatile markets, the Stop Loss can be placed at the same level as the green line.
Bill Williams Indicators in Metatrader 4
Metatrader 4 offers a wide set of built-in technical indicators and all of the Bill Williams trading indicators listed above are part of the package. In order to add any of the BW indicators to the chart, go to the Insert tab, choose Indicators and then choose the required option from a menu labeled Bill Williams. It is generally advised to new traders not to interfere with the default settings of the indicators, as they were designed the way they are in compliance with their creator’s strategy. The thing you can feel free about changing, however, is the color setting, which can be very helpful in indicators such as the market facilitation index.
Test Bill Williams Chaos Trading in Demo Mode
Before you go ahead and try trading chaos by Bill Williams in action, consider giving it a trial run using a free demo account. Demo accounts are exact copies of live MT4 accounts, with the only difference being: every trade is simulated and the trader isn’t risking anything to participate in the process. With that said, the knowledge and experience you gain are very much real and you will have a great advantage of entering the real market, once you’ve completed your practice.
What’s more, a demo account is a good way to figure out if Bill Williams trading is right for you specifically. There are so many approaches and styles when it comes to currency trading, some are complex, some are straightforward, some are quick and some take a decent amount of time to be mastered and implemented. Your task is to figure out what method fits you best, because according to Bill Williams himself, self-knowledge is the first step to trading success.