One of the relatively “undiscovered” forex technical indicators, are those created by Bill Williams. As a trader and analyst for decades, Williams realized that most technical indicators were based upon the past, markets were always changing, dynamic and not static progressions, like a musical scale.
Trading with Bill Williams Indicators
Moreover, markets had a psychological element that was not taken into account by other indicators. He tested his systems for year and came up with market indicator that can divided into five phases. The are Fractal (space), Driving force (power), Acceleration / deceleration (power), Zones (strength and power), and Balance Line (balance). Williams went on to devise a group of indicators to cover each of these areas. They are:
Alligator Oscillator. A trend indicator that uses three moving averages and measures trend, as well as trend strength. The lines indicating the moving average form a picture, supposedly of an alligator’s teeth, jaw and lips. The idea of a picture formation helps a trader remember the correct order of the moving averages more directly, so that when a change occurs, the trader has the picture in mind, and can make a trading decision.
Awesome Oscillator. Another moving average indicator. This shows the difference between several shorter period simple moving averages, which highlights the momentum of the market. The downside is the indicator tends to lag despite the shorter perspectives, so traders combine this with other technicals to determine signal strength. Indeed, the idea of the Williams indicators is to use them as part of an overall system, and not as independent signals.
Fractals. The most well known of Williams indicators, and for good reason. Traders whom use other trading methods and/or systems, will often add these to their charts. They are simple, easy to follow arrows that indicate tops and bottoms of price action, particularly when a trend is reversing. Fractals are often used to spot breakout points, confirm trends as well as trend consolidation, and can also be used by traders to draw trend lines.
Gator Oscillator. One of the more easier to read histograms that indicate at a glance, the phase or stage of price action, with the concept of opening and closing of the mouth of an alligator allegorical to the expansion and contraction of prices. In particular, traders can get visual cues to buy and sell entry signals rather quickly, though the data can lag.
Market Facilitation Index. A measurement of volume, as well as the quality of that volume. Colored bars signify the various points, such as when the market is on the move, when the market begins to fade (and with it, price action), a “fake” move which can be translated as amateurs whom don’t want to miss out entering, and a “squat”” move which appears at the end of a trend. Bill Williams stated that this indicator was more truthful than other momentum indicators like RSI and Stochastics, though most traders will also look at the candlestick patterns, as well as support and resistance levels to determine these phases.
Zone Trading Indicator. This is a combination of two Bill Williams indicators-Awesome Oscillator and Accelerator Oscillator. The idea is that traders can trade aggressively when they are in the zone. This period is when both indicators display the same colorations. This indicator measures several technical factors such as trend, momentum, and sentiment...then combines them in an easy to read manner.
Are they different? Yes, Williams Indicators are, it the same sense that Heiken Ashi for example is different, while using the same data that plain vanilla Japanese candlesticks do. All indicators are variations of other ones, so correct interpretation will always be essential, Williams wanted to make it easier for traders to see setups, without obscuring information or making it so esoteric, that traders were left scratching their heads. The indicators themselves are mathematical variations and combinations of other technical measurements that traders were already using and somewhat comfortable with, but revised to reflect markets that change and shift according to presupposed patterns. In some ways, Williams indicators are similar to Gann analysis and Elliott Wave theory in that they quantify what appears to be randomness. Williams has been successful in making a rather basic trading system, that can be learned and followed by traders whom shun complexity.
Do they work? William’s Chaos Theory postulated that markets are non linear, but they are not random over time. There are macro patterns which can be discerned. One of the main aims of Williams, was to eliminate the false signals that many technical measurements give off. In some ways, he succeeded. However, there are drawbacks. For one thing, the indicators are lagging so when entry signals do appear, the trader may have missed a good portion of the trending price movement. Traders have to be cautious. They may limit their profit potential while getting into a trade that might be near an end, but also risk price reversal. Traders can countervail these tendencies by employing other indicators that tend to be a bit faster. Many trader will use Triple Exponential Moving Averages, or simply MACD and look at divergences to reduce the risk of reversals at the end of trends.