Bill Williams refuted the claim that the market is cyclical and analysis of past data can provide information about future price movements. He believed that abusing the analysis is dangerous. However, it is crucial to understand structure of the market.
According to Williams to gain success on Forex market, one should study the market in its five fields:
- Spatial field – Fractals
- Driving Force (Trend) field – Alligator
- Momentum field – Awesome Oscillator
- Driving Force/ Momentum ratio – Acceleration/Deceleration Oscillator
- Balance curve
Until the moment when the Fractals indicator gives the first signal, the signals of the remaining measurements should be completely ignored by the trader. However, as soon as the Fractals signal opens the first position, the trader can “add” to the position when a signal of any other field appears. This approach allows to benefit up to 120% from the 30% market moves.
The exit rules are very sensitive to price movements, gives a chance to close the position in the final 10% of the trend, taking at least 80% of motion. Each principle assumes its indicator, created by Bill Williams, and helps to identify the market phases.
- Any trading instrument is suitable
- To avoid influence of market noises, we recommend using time frames higher than 15 min
- Apply Fractals Indicator
- If Alligator Indicator itself available in the trading terminal then just install it with standard inputs. Otherwise, if there is no built-in Alligator Indicator, then apply three smoothed MA of following periods: 13, 8 and 5. The longest period (13) line is blue (the alligator’s jaw), the middle one (8) is red (the alligator’s teeth), and the shortest one (5) is green (the alligator’s lips).
- Add Awesome Oscillator
- Apply Accelerator Oscillator (Acceleration/Deceleration Oscillator in some platforms)
Many people think of fractals in the sense of chaos theory and abstract mathematics. While these concepts do apply to the market, Bill Williams refer to the fractals in a more literal sense. That fractals are recurring patterns that shows reversal points among chaotic price movements.
Williams Fractals Indicator identifies fractal as a combination of five price bars. The rules for identifying fractals are as follows:
A Bearish Fractal has a bar with the highest high in the middle and two lower highs on each side.
A Bullish Fractal has lowest low in the middle and two higher lows on each side.
The appearance of the fractal itself underlies a signal. Bearish Fractal says about a possible start of the Bearish trend; Bullish fractal indicates the start of the bullish (uptrend) tendency.
Fractals signal are essential for the Williams Five strategy, without this signal trader should ignore all other indications.
Alligator Indicator consists of three Moving Averages, applied to Median Price ((High+Low)/2). Typical periods for averages: 13, 8, 5. This indicator is used to determine current market state and tendency. IN the strategy Alligator also filters false Fractals signals.
The main rule is that Alligator trend indication should match with signals from Fractal Indicator. That is, the trader should consider only Bullish signals during a Bullish trend, and only Bearish signals during a Bearish trend. That is, when Alligator indicates slow, sideways, phase of the market (Alligator Sleeps) trader should stay out of the market.
The Awesome Oscillator is an indicator used to measure market momentum. The indicator bases on the difference of a 34 Period and 5 Period Simple Moving Averages. Moving Averages uses median prices. AO serves to affirm trends or to anticipate possible reversals.
As soon as Fractals along with Alligator generated a signal, the trader should add the position (usually additional position (order) has the same size as initial) if AO gives a signal in given direction.
The Awesome Oscillator oscillates around the zero line. The Indicator has a form of a histogram of red and green bars. A bar is green when its value is higher than the previous bar and red if lower. When values are higher than the zero line – the short-term period is trending higher than the long-term period. When AO below the zero line, the short-term period is trending lower than the long-term.
A trader could consider two types of signals:
- Zero line crossings
- Bullish signal – crossing from below – up
- Bearish signal – crossing from above-down
- Red/Green signal
- Bullish signal – AO higher than zero line, red bars changed by green
- Bearish Signal – AO lower than zero line, green bars changed by red
Before trend changes, the market driving force changes its direction; the driving force acceleration must slow down and reverse. After that, it starts accelerating in the opposite direction until trend starts changing its direction. Acceleration/Deceleration Technical Indicator (AC) measures acceleration and deceleration of the current driving force.
AC bar chart is the difference between the value of 5/34 of the driving force bar chart and a 5-period simple moving average of the bar chart.
Acceleration/Deceleration Oscillator serves the same way as Awesome Oscillator; it gives additional signals.
Signals of the AC:
- Buy when the histogram is above the zero line, and two green bars appear after the red one
- Sell when the histogram is under the zero line, two red bars follows the green
- Buy when the histogram is under the zero line, and three green bars with higher minimums appeared after a red bar
- Sell when the histogram is above the zero line, and three red bars appear after the green one
Bill Williams Five strategy does not have particular Take Profit; it aims to catch as much movement as possible. In other words, all positions are closed by the Alligator Red line. If the price comes back to Alligators teeth – trader should close all positions.
Stop loss along with positions size have to correspond to the money management, the risk per one trade should not exceed 10% of the deposit. Stop Loss is set to the Alligators Blue Line.
If, after the entry point, the price already formed five consecutive bars – the exit level should be located on the previous bar extremum. Bill Williams believed that such technique allows catching the biggest parts of the trend.
Alligator shows Uptrend. As soon, as Fractals Indicator draws Bullish Fractal, we open Buy trade. Events develop in the favorable way and trend continuous to grow. Next, we get Awesome Oscillator Buy signal and add another Buy position. Two Accelerator Oscillator Buy signals follow. Alligator Red Line rule signals the end of the trend, and we close all positions in summary profit of 156 points. Considering, that the whole trend moved about 100 pips.