Trading Indicators by Bill Williams | Theory of Chaos Trading
The given indicators came into being by the strategy suggested by a legendary trader Bill Williams. Due to having a good understanding in the psychology of market he developed his own method of trading which is based on meanwhile using a rational approach to the analysis of the market and the irrational logic of chaos.
Williams rejected the science of chaos: Chaos - this is the higher degree of order, where the organizing system is based on random and chaotic events.
B. Williams argued that price movement is random and unpredictable which cause chaos in financial markets. In his theory of Chaos, he rejects the linear method of trading, according to which future prices are forecasted depending on the analysis of the past. As a result of his investigations Williams came to the conclusion that standard indicators have limited capabilities because of their linearity.
To understand the overall structure of the market B. Williams advised to analyze the market through the following five dimensions:
- Fractal (phase space)
- The driving force (energy phase)
- Acceleration / deceleration (power phase)
- Zone ( combination of strength / power phase)
- Balance Line
For understanding and analyzing these dimensions there have been established a number of indicators.
Acceleration/Deceleration (AC) technical indicator signals the acceleration or deceleration of the current market driving force.
Alligator is an indicator designed to signal a trend absence, formation and direction. Bill Williams saw the alligator's behavior as an allegory of the market's one: the resting phase is turning into the price-hunting as the alligator awakes so that to come back to sleep after the feeding is over. The longer the alligator is sleeping the hungrier it gets and the stronger the market move will be.
Awesome Oscillator (AO) is a momentum indicator reflecting the precise changes in the market driving force which helps to identify the trend’s strength up to the points of formation and reversal.
Fractals is an indicator highlighting the chart’s local heights and lows where the price movement had stopped and reversed. These reversal points are called respectively Highs and Lows.
The Gator Oscillator (GO) is a supplement to the Alligator indicator and is used alongside with it showing the absolute degree of convergence/divergence of the Alligator's three SMAs pointing at the Alligator's periods of slumber and awakeness (i.e. trending and non-trending market phases).
The Market Facilitation Index is designed for evaluation the willingness of the market to move the price. The indicator's absolute values alone cannot provide any trading signals unlike it's dynamics in relation to the dynamics of the volume.