Catching the Trend Strategy

The theory of chaos by Bill Williams is a famous stock market trading strategy. This deft stock analyst has revolutionized the world of market analysis. The trading system of Bill Williams states that there is a systematism even in chaos. Using this systematism each trader can foresee the potential movement of stock prices.

Bill Williams is an example of a self-made man. He was born in a poor priest family. Mathematics began to interest him at school. He entered the University of Economics, after which he married a beautiful classmate. To support his family, he stubbornly began working at the stock exchange, studying the financial market in detail, creating his own strategies and writing books in order to share his knowledge with others.

Looking For A Market Where You Can Trade

Suppose you currently have no open positions. You are looking for an opportunity to buy or sell. As we have already noted in our previous materials for a long time, there are no directed movements on the market. Trade is in a certain range. In such a situation, it is practically impossible to make substantial profits. Many traders, on the contrary, lose during the periods of range trading.

The first tool that will be interesting to us in this situation is the Alligator indicator. We are interested in the “sleeping” Alligator (all curves of this indicator must be intertwined with each other). Here the preparations for the opening of positions. It is best to work with pending orders. To do this, put up a buying order for, which will be above the “mouth of the Alligator.” In order to open a short position, a pending order must be lower.

We want to get the maximum profit. Thus, we should find all possible options. As practice shows, strong movements can start in the most boring markets. That is, if it seems to you that the market has frozen, you should be ready to open positions.

Conditions for success in working with this strategy:

  • Alligator indicator is in the sleeping state
  • AO indicator is close to 0
  • AU indicator is close to 0

Figure 1. Alligator sleeps, AO and AC are close to zero

Breakout Fractal

After we have found the period where the Alligator indicator is in a sleeping state, the first thing we can do is to find the corresponding fractal indicator, which will give a signal for opening the position. In order to identify such a signal, it is necessary that the maximum value of the average candle in the fractal structure be either lower or higher than the Alligator’s teeth. This curve is red. Further, several more signals may appear, but we will work only when the price overcomes this fractal structure. Use only the last time signal.

Figure 2. Buying fractal

Aggressive Positioning

Further, after we were able to find this first fractal on the chart, and it has been broken by price, we can use any emerging fractal in the same direction. From this point, you can trade more intensively. In general, in such a situation, the market moves along with our forecasts.

After the price breaks through the first fractal, there may be two options. We either receive income or there is no income. In the second case, it is recommended to put stop orders. The essence of this trading system is to work aggressively using all possible signals.

Figure 3. Adding volume to the opened position

Protection Of The Opened Positions

In order to competently close positions, you must also use a certain system. This can be done when the price is first closed above or below the red curve. Suppose the mouth of the Alligator does not open, and the price stops closer to the red line, so we should try to set a stop and open the opposite position at the first fractal in the other direction (of course, this fractal should be outside the red line).

Figure 4. Red line – Alligator’s teeth

If the entry is successful, we can continue to gradually increase our positions and begin to look for an opportunity to fix them in the future.

Profit Fixing

By the current moment, we need to decide which strategy of fixing positions we will use. Below we give examples of how to act in this case. There are four options:

  • The closing of the candle above or below the red line. This is the best option in terms of time parameters. However, in some cases, the price will continue to move in your direction. Fixing the profit a little earlier, you will lose part of the income. If that doesn’t suit you, let’s turn to the next opportunity.
  • Five consecutive candles of the same color. In such a situation, the stop order can be placed after the extremum of the fifth candle in a row. However, as extremes grow (depending on whether you are talking about a bullish or a bearish market), you will gradually move your stop order. This approach will allow you to get even more from the market.

Figure 5. Stop loss after the fifth candle

  • There are situations when the market gives a very strong impetus in your direction. Naturally, you want to use this opportunity fully. Here you can use the green line. Despite the fact that this method can reduce your profits, this is the best solution in many cases.

Figure 6. Alligator’s lips

  • Opposite signals. This method is rarely used. It is relevant for those situations where you fear for your profit and want to close the position as soon as possible. Despite the fact that you will not receive maximum income, your positions will be protected.

The Discrepancy Between Market Power And Price

We can say that the AO indicator used in this strategy is one of the best tools to understand the structure of the market and its driving force. If the short-term force of the market movement is faster than the long-term one, then the indicator will show increasing values.

Divergence is formed when the price highs are updated, and the AO indicator indicators do not update their maximum values. This is a common stock market divergence, which is fairly easy to find on a chart using such an algorithm. In many ways, it is similar to the divergence, which is formed by the price and the MACD indicator.

In most markets, a double divergence may occur. For this, it is necessary that the price maximum is updated twice, and then one more time again. As for the AO indicator, the maximums are no longer updated and the second maximum extremum will be lower than the first, and the third is even lower than the second. The appearance of a second divergence is a stronger signal that there will be a reversal on the market. If this does not happen, the discrepancy will accumulate a third time. However, four-time divergences are extremely rare, perhaps they occur only a couple of times a year.

Balance Curve

Balance curve analysis is another important step when working with the trading system. You can call this method the fifth dimension of the market situation. The main objective of the method is to determine the signal before the corresponding stock market fractal appears.

The balance represents the line on which the price would be oriented, if the incoming new information is not taken into account. This information affects the market in real time. In order to understand how much new information has an impact on the market, we can analyze the distance between the current value of the asset and the balance curve.

In order to perceive the information received easily, it is worth considering the balance as the top of the mountain. If new information arrives on the market, it is easier for the price to move away from the balance curve. Thanks to the balance curve, we can see the direction in which the price could move with the least resistance. If you carefully examine the screenshot, then you will see that the price first went down, and then began to draw closer to the line of balance.

Figure 7. Price movement below the balance curve

The main goal that we pursue when working with this strategy is to find an opportunity to enter the market at the moment when the price leaves the balance line.

Balance Line Of Buying

The signals for the opening of the long position are the following (if the price is above the balance curve):

  • Look on the chart from right to left
  • Pay attention to the maximum values only when we are looking for signals to open a long position
  • The base candle is the starting point
  • It is necessary to determine the base candle at first. In order to find it, you need to find the candle with the lowest maximum value
  • After that, you need to find a new maximum value for opening a position

Figure 8. Long position opening signal

Long position opening signals (if the price is below the balance line):

  • Look on the chart from right to left
  • Maximum values should be considered only when we are in search of signals for opening a long position
  • The base candle is the starting point for analysis. It must be found first. To determine it, you need to find a candle with the minimized maximum value. In order to open a long position after this, it is necessary to find two new maximum values that will be higher than the previous one.

Figure 9. Long position opening signal

Balance Line Of Sale

Short position opening signals (if the price is above the balance line):

  • Look on the chart from right to left
  • Minimums are taken into account solely in order to search for signals for sale
  • The base candle is the starting point. It must be determined in the beginning. To do this, we find the candle with the highest minimum. Next, look for two other minima in order to open a short position.

Figure 10. Sell order placing

Short position opening signals (if the price is below the balance line):

  • Look on the chart from right to left
  • Minimums are taken into account only in the case of searching for signals to open a short position
  • The base candle is considered as a starting point. It is necessary to determine this candle. This is a candle with the smallest value of the minimum. The task is to find the new order to enter the market

Trading In Various Zones Using Balance Line Signals

After you have studied all the above information, you can add certain factors that complicate the work a little. Precisely because of this complication, possible profit from trading is rapidly growing. These factors can be called filters.

The Alligator indicator will be used as the first such filter. Regardless of the received signal, you should respond only to the one that is formed outside the mouth of the Alligator. The direction of movement should indicate that this signal will remain outside the mouth of the Alligator.

The second filter is the zone in which the price is located. If it is red, but the price is above the balance line, we need to open a long position. It is necessary to determine the starting candle, as well as two other candles, which have higher maximum values.

In another situation, when the price is above the balance and in the green zone, we are looking for an opportunity to open a short position. We need to find four minimized lows. In order to look for bullish signals in red or for sale in the green zones, it is necessary to double the signal requirements.

We hope that you enjoyed this article and want to hear from you. If you have any questions or comments feel free to email the team at

Happy Trading!

-The TMP Team

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