Bill Williams Chaos Theory Overview
Bill Williams developed his unique theory by combining business psychology with chaos theory and its effects on markets.
He suggested that the rewards of business and investment remain determined by human psychology and that anyone can become a profitable trader or investor if he encounters a hidden determinism in seemingly random market events.
Williams argues that primary or technical examinations do not have the possibility of ensuring stable profitable results because they do not see the real market. In addition, he argues that traders lose because they are based on various types of studies, which are useless in non-linear dynamic models, that is, real markets.
Business is a psychological game, the way of self-realization and self-knowledge, so the best way to be successful is to find your business self, get to know it better, and follow it no matter what.
In this way, there are 2 significant points: self-knowledge and understanding of the composition of the market. Bill Williams believes that making money could be simple if you understand the makeup of the market.
To do this, he should consider the inherent pieces of the market called magnitudes, all of which add to the overall picture.
These market magnitudes are:
• Fractal (Phase space)
• Instant (phase energy)
• Incredible Oscillator (AO)
• Acceleration / Deceleration (Phase Force)
• Region (Energy Combination / Phase Force)
• Balance line (Strange attractors)
It should be said that before the first magnitude (Fractals) makes a signal, each of the signals generated by other magnitudes must be ignored.
When the position is open in the direction of the first fractal signal, the trader "adds" to this position each time a signal of other magnitudes is created. As a consequence, a market shift of 30% offers the possibility of making a profit.
Williams' procedure for exiting the market is quite sensitive to cost movements, thus helping to set the trend income, capturing no less than 80% of the displacement. The Bill Williams theory has become quite popular among Forex traders.
The Chaos Theory of Bill William Alligator and Gator
Bill Williams explains the Alligator as a compass that keeps his business in the right direction. The Alligator helps you identify a true trend and stay out of tight range trades, which constantly result in losses.
The Alligator is the conjunction of 3 lines of balance:
Crocodile jaw (the blue line)
- 13-period moving average at average cost (High + Low) / 2, which is offset 8 bars in the future.
Crocodile teeth (the red line)
- 8-period moving average at average cost (High + Low) / 2, which is offset 5 bars in the future.
Crocodile lips (the green line)
- 5-period moving average at average cost (High + Low) / 2, which is offset by 2 bars in the future.
If the 3 lines remain intertwined, the Alligator is asleep and the market is reduced by the range:
The more you sleep, the more craving you have.
Once you wake up from a long sleep, the cost follows that much further, making the cost movements so much stronger.
When the crocodile is asleep, stand firm.
When the crocodile wakes up, it opens its mouth (the balance lines diverge) and begins to hunt.
Having eaten enough, it rests again (the equilibrium lines converge), so it is time to repair the income.
If the crocodile is not asleep, the market is trending up or down:
• If the cost is above the crocodile's mouth, then it is an uptrend.
• If the cost is below the crocodile's mouth, then it is a downtrend.
The Alligator also helps establish the character of Elliot's waves:
• If the cost is out of the Alligator's mouth, the wave is impulsive.
• If the cost is in the crocodile's mouth, the wave is corrective.
The formula for the crocodile:
Mid Point Price = (High + Low) / 2
Alligator Jaw = SMA (Midpoint Price, 13, 8)
Crocodile Teeth = SMA (Midpoint Price, 8, 5)
Crocodile Lips = SMA (Midpoint Price, 5, 3)
Where:
• High - The Maximum Bar Cost.
• Low: Lowest Bar Cost.
• SMA (A, B, C) - Smoothed Moving Average (A - Smoothed Data, B - Smoothed Lapse, C - Move Into The Future).
• Alligator Jaw - Blue Line.
• Alligator's Teeth - Red Line.
• Alligator Lips - Green Line.
The Gator Oscillator
The Gator Oscillator Shows The Convergence / Divergence Level Of The Equilibrium Lines: Gator To Build The Gator Oscillator
The Gator Oscillator Is Displayed As 2 Histograms:
• The Above Zero Histogram Shows The Distance Between The Blue And Red Lines (Between The Jaw And The Teeth Of The Crocodile).
• The Below Zero Histogram Shows The Distance Between The Red And Green Lines (Between The Teeth And The Lips Of The Crocodile).
All the bars of each histogram are green or red:
• The Histogram Bar Is Red If It Is Lower Than The Previous One.
• The Histogram Bar Is Green If It Is Higher Than The Previous One.
The Gator Oscillator evidently shows the convergence and intertwining of the balance lines once the crocodile is asleep or awake, thus helping to detect a trend.
Fractals
Bill Williams suggests that it is better not to do operations before the first fractal is activated.
A buy fractal is a sequence of 5 consecutive bars where the highest is preceded by 2 lower highs and is followed by 2 lower highs. The opposite configuration could be a marketing fractal. Both
Fractals (buy and sell) have the ability to share bars.
Fractals produce the following signals:
• If a buy fractal is above the crocodile's teeth (the red line) we would place a buy stop one tick above the highest fractal upwards.
• If a trading fractal is below the crocodile's teeth, we would place a Sell Stop one TICK below the low of the fractal's trading signal.
• We would not accept a purchase if a fractal forms under the crocodile's teeth.
• We would not accept a commercialization if a fractal forms on the crocodile's teeth. Fractals are valid until they are triggered or a new fractal emerges in the same direction. In this situation, the old signal should be ignored and the pending order should be removed.
Fractals are objects of the first magnitude. Only after the separation of the first fractal do they have the possibility to admit the next signals to open positions in the direction of the first signal. The signals of the fractals followed in the direction of the first deal have the possibility to use to add to the posture.
This is one way to use fractals. There are numerous ways, but actually this is the one that the theory is mentioned.
Bill William Awesome Oscillator (AO)
It establishes the momentum of the market in a given time in the last 5 bars, comparing them with the promotion in the last 34 bars.
Awesome Oscillator (AO) is simply the difference between the basic 34 and 5-period moving averages of the middle aspects of the bar (H + L) / 2.
Awesome Oscillator (AO) is displayed on the graph as a histogram:
Awesome Oscillator creates 3 buy signals and 3 trade signals, however we do not use them until the first fractal buy or trade signal is triggered outside the Alligator's mouth.
The Awesome Oscillator buy signal
The Awesome Oscillator buy signal is created once the histogram above the zero line changes its direction from descending to ascending:
The bar-based Awesome Oscillator buy signal:
Bar A should be preeminent to Bar B. And it could be any color. We could take Bar A as the access. Yet with high danger. For this, a divergence in the cost and the indicator would be sought.
Exemplifying. A small difference between the cost and closing of the Bar. For that we could join the graph to another period of time and visualize the behavior of AO in that period. Generally 4h is constantly used.
As we have the possibility to realize, we could complement ourselves with other tools. In order to increase the possibility of success. In this situation, the jaw has been lost. Dropping the cost below this. If we wanted to operate only using AO. We would look for a divergence. Either in the histogram or in the histogram bars, or in the cost crossover 0 of the histogram.
Bar B lower than A, precisely green. And the cost and indicators have to reflect this.
The next Bar should be precisely green to use the AO for a buy signal. And this color should also be represented on the graph. In addition, other tools such as RSI should complement each other and continue this action by climbing values in the indicators to a bullish way.
The next Bar C, could be any color, at this point we should already put a StopLoss in profit. To prevent us from a false signal.
If the next bars do not break our stoploss and continue the trend breaking the AO upwards by exceeding cost 0. We have taken a good access.
If we had used a 4h chart. We also could have had the same income. With a crossover AO at cost 0.
AO weakness:
Another way to enter. It is looking for a continuity of exhaustion of the trend.
An example of bearish exhaustion:
If we complement with another indicator such as RSI. We could visualize the same. Cost is getting closer and closer to 0. Then we could wait for it to break out to the upside. There is probably a false signal. We will accept the losses. However, the cost if it continues to approach 0. More feasible is a buy signal. Complemented with other tools.
These concepts are used either up or down. However, on the contrary. It is worth mentioning that you should backtest before using this theory.
Acceleration / Deceleration Oscillator (AC)
El oscilador de aceleración/desaceleración (AC) mide la aceleración y desaceleración del fomento de hoy.
Bill Williams argues that before cost behavior changes, encouragement changes and, even before encouragement, we see the change in acceleration.
This is Building Histogram (Awesome Oscillator) and a simple 5-bar moving average in Awesome Oscillator:
Average Price = (High + Low) / 2
AO = SMA (Average Price, 5) - SMA (Average Price, 34)
AC = AO - SMA (AO, 5)
Where:
• High: The Cost of Major Bar.
• Low: Lowest Bar Cost.
• SMA - Easy Moving Average.
• AO - Incredible Oscillator.
To use this indicator. It is suggested to supplement the AO. Because it prioritizes an acceleration of movements. Being that you do not get the viable best profit in this thanks to this.
The Accelerator can anticipate market movements earlier than the AO, however, being an accelerator it does not prioritize a deep trend. Increasing the possibility of erroneous signals. Continuously.
Market Facilitation Index (BW MFI)
Market Facilitation Index (BW MFI) Examines The Portion That Changes The Cost For Each Unit Of Volume.
The Market Facilitation Index (BW MFI) is calculated as follows:
MFI = (High - Low) / Volume
Where:
• High - The Higher Cost Of The Present Bar;
• Low - The Lowest Cost Of The Bar Today;
• Volume - Today's Bar Volume.
Market Facilitation Index (BW MFI)
The technical indicator "The Market Facilitation Index" (BW MFI) shows the cost change that occurs in one tick. The absolute values of the indicator as such do not have an effective meaning, only the changes of the indicator have the meaning. Bill Williams attributes great significance to the indicator and volume changes:
- The Market Facilitation Index indicator rose and volume also rose, which suggests the following: a) more and more players enter the market (volume grows), b) newcomers open positions in the direction of the development of the bar, or that is, the displacement has begun and is getting fast.
- The Market Facilitation Index indicator has fallen and the volume has also fallen. This assumes that the market competitors are losing interest.
- The Market Facilitation Index indicator rose, however the volume has fallen. This suggests that the market does not have volume support from traders and the cost changes due to the speculations of traders "on the ground" (intermediaries - brokers and dealers).
- The Market Facilitation Index indicator has fallen, however, the volume rose. There is a battle between the bulls and bears that is characterized by a large volume of purchases and sales, but with a weak displacement of the same cost as a consequence of the equitable force in the two directions. One of both military pieces (buyers versus sellers) is going to triumph. Mainly the dissolution of this bar indicates whether or not this bar establishes the continuation of the trend, or cancels it. Bill Williams calls this bar "seated".
Use
The absolute cost of the index is the elevation of the pictogram bar, and the comparison of the dynamics of the index with the dynamics of the volume is reflected in the color of the bar, which is essential for the interpretation of the indicator:
- Green bar - both the MFI index and the volume keep growing. The increasing activity of traders benefits the acceleration of the movement. It is worth joining the trend.
- Blue bar - MFI index is growing, volume is decreasing. The market shift continues its course despite a drop in volume. The trend can change fast.
- Pink bar - MFI index is falling, volume is growing. The shift is slowing down, while the increasing volume would spell the probability of a breakout or trend reversal.
- Brown bar - both the MFI index and the volume keep falling. The market is not holding the current trend and is waiting for signs for its future development.
Another way is by using the LazyBear flag.
Bill Williams' Market Facilitation Index charts the effectiveness of cost displacement by calculating cost displacement per unit volume.
4 possible combinations of MFIndex and Volume are:
Regular - Green: MFIndex increases and increases the volume. This means that the proportion of competitors entering the market increases, consequently, the volume increases and the new entrants align their positions in the direction of the increase of the candles.
Fade - Blue: MFIndex drops and the volume drops. it assumes that market competitors are indifferent and the cost shift is tiny in small volumes. This often happens to finally happen from a trend.
False - Gray: MFIndex increases, however the volume falls. It is quite possible that the market is supported by the speculation of the brokers and not by a significant volume of consumers.
Squat - Red: MFIndex drops, but volume increases. In this special case, the bulls and bears keep fighting each other to see who will dominate the next trend. These battles are noted for the huge volumes of purchase and marketing. However, the cost does not change appreciably because the strengths are equivalent. One of the competing pieces, whether it be the consumers or the sellers, will ultimately triumph in the contest. In most cases, the breaking of that candle suggests whether this particular candle establishes the continuation of the trend or if it ends it.
Bill Williams developed his unique theory by combining business psychology with chaos theory and its effects on markets.
He suggested that the rewards of business and investment remain determined by human psychology and that anyone can become a profitable trader or investor if he encounters a hidden determinism in seemingly random market events.
Williams argues that primary or technical examinations do not have the possibility of ensuring stable profitable results because they do not see the real market. In addition, he argues that traders lose because they are based on various types of studies, which are useless in non-linear dynamic models, that is, real markets.
Business is a psychological game, the way of self-realization and self-knowledge, so the best way to be successful is to find your business self, get to know it better, and follow it no matter what.
In this way, there are 2 significant points: self-knowledge and understanding of the composition of the market. Bill Williams believes that making money could be simple if you understand the makeup of the market.
To do this, he should consider the inherent pieces of the market called magnitudes, all of which add to the overall picture.
These market magnitudes are:
• Fractal (Phase space)
• Instant (phase energy)
• Incredible Oscillator (AO)
• Acceleration / Deceleration (Phase Force)
• Region (Energy Combination / Phase Force)
• Balance line (Strange attractors)
It should be said that before the first magnitude (Fractals) makes a signal, each of the signals generated by other magnitudes must be ignored.
When the position is open in the direction of the first fractal signal, the trader "adds" to this position each time a signal of other magnitudes is created. As a consequence, a market shift of 30% offers the possibility of making a profit.
Williams' procedure for exiting the market is quite sensitive to cost movements, thus helping to set the trend income, capturing no less than 80% of the displacement. The Bill Williams theory has become quite popular among Forex traders.
The Chaos Theory of Bill William Alligator and Gator
Bill Williams explains the Alligator as a compass that keeps his business in the right direction. The Alligator helps you identify a true trend and stay out of tight range trades, which constantly result in losses.
The Alligator is the conjunction of 3 lines of balance:
Crocodile jaw (the blue line)
- 13-period moving average at average cost (High + Low) / 2, which is offset 8 bars in the future.
Crocodile teeth (the red line)
- 8-period moving average at average cost (High + Low) / 2, which is offset 5 bars in the future.
Crocodile lips (the green line)
- 5-period moving average at average cost (High + Low) / 2, which is offset by 2 bars in the future.
If the 3 lines remain intertwined, the Alligator is asleep and the market is reduced by the range:
The more you sleep, the more craving you have.
Once you wake up from a long sleep, the cost follows that much further, making the cost movements so much stronger.
When the crocodile is asleep, stand firm.
When the crocodile wakes up, it opens its mouth (the balance lines diverge) and begins to hunt.
Having eaten enough, it rests again (the equilibrium lines converge), so it is time to repair the income.
If the crocodile is not asleep, the market is trending up or down:
• If the cost is above the crocodile's mouth, then it is an uptrend.
• If the cost is below the crocodile's mouth, then it is a downtrend.
The Alligator also helps establish the character of Elliot's waves:
• If the cost is out of the Alligator's mouth, the wave is impulsive.
• If the cost is in the crocodile's mouth, the wave is corrective.
The formula for the crocodile:
Mid Point Price = (High + Low) / 2
Alligator Jaw = SMA (Midpoint Price, 13, 8)
Crocodile Teeth = SMA (Midpoint Price, 8, 5)
Crocodile Lips = SMA (Midpoint Price, 5, 3)
Where:
• High - The Maximum Bar Cost.
• Low: Lowest Bar Cost.
• SMA (A, B, C) - Smoothed Moving Average (A - Smoothed Data, B - Smoothed Lapse, C - Move Into The Future).
• Alligator Jaw - Blue Line.
• Alligator's Teeth - Red Line.
• Alligator Lips - Green Line.
The Gator Oscillator
The Gator Oscillator Shows The Convergence / Divergence Level Of The Equilibrium Lines: Gator To Build The Gator Oscillator
The Gator Oscillator Is Displayed As 2 Histograms:
• The Above Zero Histogram Shows The Distance Between The Blue And Red Lines (Between The Jaw And The Teeth Of The Crocodile).
• The Below Zero Histogram Shows The Distance Between The Red And Green Lines (Between The Teeth And The Lips Of The Crocodile).
All the bars of each histogram are green or red:
• The Histogram Bar Is Red If It Is Lower Than The Previous One.
• The Histogram Bar Is Green If It Is Higher Than The Previous One.
The Gator Oscillator evidently shows the convergence and intertwining of the balance lines once the crocodile is asleep or awake, thus helping to detect a trend.
Fractals
Bill Williams suggests that it is better not to do operations before the first fractal is activated.
A buy fractal is a sequence of 5 consecutive bars where the highest is preceded by 2 lower highs and is followed by 2 lower highs. The opposite configuration could be a marketing fractal. Both
Fractals (buy and sell) have the ability to share bars.
Fractals produce the following signals:
• If a buy fractal is above the crocodile's teeth (the red line) we would place a buy stop one tick above the highest fractal upwards.
• If a trading fractal is below the crocodile's teeth, we would place a Sell Stop one TICK below the low of the fractal's trading signal.
• We would not accept a purchase if a fractal forms under the crocodile's teeth.
• We would not accept a commercialization if a fractal forms on the crocodile's teeth. Fractals are valid until they are triggered or a new fractal emerges in the same direction. In this situation, the old signal should be ignored and the pending order should be removed.
Fractals are objects of the first magnitude. Only after the separation of the first fractal do they have the possibility to admit the next signals to open positions in the direction of the first signal. The signals of the fractals followed in the direction of the first deal have the possibility to use to add to the posture.
This is one way to use fractals. There are numerous ways, but actually this is the one that the theory is mentioned.
Bill William Awesome Oscillator (AO)
It establishes the momentum of the market in a given time in the last 5 bars, comparing them with the promotion in the last 34 bars.
Awesome Oscillator (AO) is simply the difference between the basic 34 and 5-period moving averages of the middle aspects of the bar (H + L) / 2.
Awesome Oscillator (AO) is displayed on the graph as a histogram:
Awesome Oscillator creates 3 buy signals and 3 trade signals, however we do not use them until the first fractal buy or trade signal is triggered outside the Alligator's mouth.
The Awesome Oscillator buy signal
The Awesome Oscillator buy signal is created once the histogram above the zero line changes its direction from descending to ascending:
The bar-based Awesome Oscillator buy signal:
Bar A should be preeminent to Bar B. And it could be any color. We could take Bar A as the access. Yet with high danger. For this, a divergence in the cost and the indicator would be sought.
Exemplifying. A small difference between the cost and closing of the Bar. For that we could join the graph to another period of time and visualize the behavior of AO in that period. Generally 4h is constantly used.
As we have the possibility to realize, we could complement ourselves with other tools. In order to increase the possibility of success. In this situation, the jaw has been lost. Dropping the cost below this. If we wanted to operate only using AO. We would look for a divergence. Either in the histogram or in the histogram bars, or in the cost crossover 0 of the histogram.
Bar B lower than A, precisely green. And the cost and indicators have to reflect this.
The next Bar should be precisely green to use the AO for a buy signal. And this color should also be represented on the graph. In addition, other tools such as RSI should complement each other and continue this action by climbing values in the indicators to a bullish way.
The next Bar C, could be any color, at this point we should already put a StopLoss in profit. To prevent us from a false signal.
If the next bars do not break our stoploss and continue the trend breaking the AO upwards by exceeding cost 0. We have taken a good access.
If we had used a 4h chart. We also could have had the same income. With a crossover AO at cost 0.
AO weakness:
Another way to enter. It is looking for a continuity of exhaustion of the trend.
An example of bearish exhaustion:
If we complement with another indicator such as RSI. We could visualize the same. Cost is getting closer and closer to 0. Then we could wait for it to break out to the upside. There is probably a false signal. We will accept the losses. However, the cost if it continues to approach 0. More feasible is a buy signal. Complemented with other tools.
These concepts are used either up or down. However, on the contrary. It is worth mentioning that you should backtest before using this theory.
Acceleration / Deceleration Oscillator (AC)
El oscilador de aceleración/desaceleración (AC) mide la aceleración y desaceleración del fomento de hoy.
Bill Williams argues that before cost behavior changes, encouragement changes and, even before encouragement, we see the change in acceleration.
This is Building Histogram (Awesome Oscillator) and a simple 5-bar moving average in Awesome Oscillator:
Average Price = (High + Low) / 2
AO = SMA (Average Price, 5) - SMA (Average Price, 34)
AC = AO - SMA (AO, 5)
Where:
• High: The Cost of Major Bar.
• Low: Lowest Bar Cost.
• SMA - Easy Moving Average.
• AO - Incredible Oscillator.
To use this indicator. It is suggested to supplement the AO. Because it prioritizes an acceleration of movements. Being that you do not get the viable best profit in this thanks to this.
The Accelerator can anticipate market movements earlier than the AO, however, being an accelerator it does not prioritize a deep trend. Increasing the possibility of erroneous signals. Continuously.
Market Facilitation Index (BW MFI)
Market Facilitation Index (BW MFI) Examines The Portion That Changes The Cost For Each Unit Of Volume.
The Market Facilitation Index (BW MFI) is calculated as follows:
MFI = (High - Low) / Volume
Where:
• High - The Higher Cost Of The Present Bar;
• Low - The Lowest Cost Of The Bar Today;
• Volume - Today's Bar Volume.
Market Facilitation Index (BW MFI)
The technical indicator "The Market Facilitation Index" (BW MFI) shows the cost change that occurs in one tick. The absolute values of the indicator as such do not have an effective meaning, only the changes of the indicator have the meaning. Bill Williams attributes great significance to the indicator and volume changes:
- The Market Facilitation Index indicator rose and volume also rose, which suggests the following: a) more and more players enter the market (volume grows), b) newcomers open positions in the direction of the development of the bar, or that is, the displacement has begun and is getting fast.
- The Market Facilitation Index indicator has fallen and the volume has also fallen. This assumes that the market competitors are losing interest.
- The Market Facilitation Index indicator rose, however the volume has fallen. This suggests that the market does not have volume support from traders and the cost changes due to the speculations of traders "on the ground" (intermediaries - brokers and dealers).
- The Market Facilitation Index indicator has fallen, however, the volume rose. There is a battle between the bulls and bears that is characterized by a large volume of purchases and sales, but with a weak displacement of the same cost as a consequence of the equitable force in the two directions. One of both military pieces (buyers versus sellers) is going to triumph. Mainly the dissolution of this bar indicates whether or not this bar establishes the continuation of the trend, or cancels it. Bill Williams calls this bar "seated".
Use
The absolute cost of the index is the elevation of the pictogram bar, and the comparison of the dynamics of the index with the dynamics of the volume is reflected in the color of the bar, which is essential for the interpretation of the indicator:
- Green bar - both the MFI index and the volume keep growing. The increasing activity of traders benefits the acceleration of the movement. It is worth joining the trend.
- Blue bar - MFI index is growing, volume is decreasing. The market shift continues its course despite a drop in volume. The trend can change fast.
- Pink bar - MFI index is falling, volume is growing. The shift is slowing down, while the increasing volume would spell the probability of a breakout or trend reversal.
- Brown bar - both the MFI index and the volume keep falling. The market is not holding the current trend and is waiting for signs for its future development.
Bill Williams' Market Facilitation Index charts the effectiveness of cost displacement by calculating cost displacement per unit volume.
4 possible combinations of MFIndex and Volume are:
Regular - Green: MFIndex increases and increases the volume. This means that the proportion of competitors entering the market increases, consequently, the volume increases and the new entrants align their positions in the direction of the increase of the candles.
Fade - Blue: MFIndex drops and the volume drops. it assumes that market competitors are indifferent and the cost shift is tiny in small volumes. This often happens to finally happen from a trend.
False - Gray: MFIndex increases, however the volume falls. It is quite possible that the market is supported by the speculation of the brokers and not by a significant volume of consumers.
Squat - Red: MFIndex drops, but volume increases. In this special case, the bulls and bears keep fighting each other to see who will dominate the next trend. These battles are noted for the huge volumes of purchase and marketing. However, the cost does not change appreciably because the strengths are equivalent. One of the competing pieces, whether it be the consumers or the sellers, will ultimately triumph in the contest. In most cases, the breaking of that candle suggests whether this particular candle establishes the continuation of the trend or if it ends it.