Bill Williams - Trading Chaos - Dow Jones

Since the Indian markets are so dependent on US markets, I thought why not have Dow Jones analysis also done. So here it is for your decision.

Friends, I am trying to implement an Trading Strategy proposed by Mr Bill Williams called Chaos Trading( read his book Trading Chaos: Applying Expert Techniques to Maximize Your Profits) on excel to give an insight in current confusing markets. This is an honest endeavour to understand what is the present trend and following steps which will lead to identify profitable trades. What I have done is to understand the theory through various sources ( books & websites) and present it in an easily comprehensive manner for all and sundry. I will be more than happy to receive your comments to improve this for future trading. Also, I am ready to remove this if it violates any copyright/intellectual rights issues.

Coming back to the Chaos Trading Strategy.
This trading strategy is a simple logic based strategy which tells us to first identify the trends, verify the trends, identify the trading signals, verify the trading signals and execute them if the sentiment is conducive. Seems like very easy and logical but I am amazed as to how it has been done in a very orderly manner in this trading strategy along with verifiable results.

First Step:
Chaos Trading begins with what is called Alligator indicators. In simple words Alligator indicators are composed of three balance lines which have been smoothed with various time periods. There are three Alligators indicators : Jaw, Teeth and Lips. When the markets are range bound the Alligator sleeps which means all three lines are intertwined. The scene changes when there is trend in markets. In an uptrend the price will be above all three line and in downtrend the price will be below all the three lines. The trading opportunity is created when the three lines start diverging and ends when the three lines converge.






Second Step:
the good part of this trading strategy is that it verifies every step. So, since we identified the trend in last step, now is the time to verify it. Gator indicators are nothing but delta value of three different lines. However it brings fore the fact how all three line are behaving in relation to each other. Lines converge when the difference become lesser and lines diverge when difference becomes greater. Analysing both the delta values gives us a clear picture of the Alligator.


Third Step:

This is the most important part of the strategy which actually gives us the trading opportunities. A buy signal is generated when in last five days the highest high is preceded by two lower highs and followed by two lower highs. Similarly for sell signal, there should be lowest low preceded by two higher lows and followed by two higher lows. The explanantion provided earlier is valid for uptrend. The reverse will happend in downtrend.


Fourth Step:
It involves use of two oscillators , Awesome and Acceleration / Deceleration Oscillator (AC). These are simply the delta of moving averages of (High+Low)/2 in different time periods. They show the trend as well as generate buy and sell signals which is to verify the previous signal generated in Third Step.



Fifth Step:
This the step which helps us to dertermine the trading environment based on movement of the oscillators.


I have tried to provide a simplistic understanding of the Trading Strategy. Please observe and understand before using this. As usual data has been extracted from Yahoo, so it will be incorrect for "Today" untill Yahoo updates its feed.