Trading Chaos: Profitunity System by Bill Williams

Unless we change our direction, we are most likely to end up where we are headed (Chinese proverb)

Hello, dear friends, Forex traders! Today we talk about a classical Profitunity strategy from the book of Bill Williams „Trading Chaos”. This strategy has contradictory reviews, some people trade on it for 8 years, someone loses (although, as we know, trolls always lose). Why has this system become so famous? Is it still relevant to the present day? What are its strengths and weaknesses? All of this, as well as a short summary of the book, is in our today’s review.

Features of the Profitunity strategy

Platform: Any
Currency pairs: Any
Timeframe: Any (recommended D1)
Trading Hours: Around the clock
Recommended broker: Roboforex, Exness

Bill Williams

Bill Williams, the author of the strategy, was born in 1928 and started trading in 1959. That time he worked as a teacher in a business school in Florida, and the idea to start making trades he took from the professor from the Accounting Department, in fact, completely copying his actions on his own account. So, after having traded like that nearly 21 years, a former teacher decided to start doing professional trading. But, unfortunately, the independent trading did not bring positive results. Only after losing a lot of money by trading by other people’s information bulletins (signals), Bill began to explore the market independently that led to Profitunity strategy, which we discuss below.

Market is the sum of opinions

The market, according to Bill Williams, actually, is very simple. In fact, the market is the sum of the views of all investors. Traders trade in different timeframes, having different goals: for someone, it’s important to make a profit, while others just hedge their risks. In the case of forex, this could be a simple need for currency. All these players see a different picture of the market, which forms separate movements, trends, etc.

If you remove from the chart display of the timeframe, you can hardly guess, to what time period this chart belongs. Our perception of reality is very relative and depends on what point of view we currently use. One conclusion of the author says: “All the trends in the market change direction accompanied by a higher fractal number than bars leading to a change of the trend“. In other words, it shows that all time frames on the market are linked – first, the trend changes on the lowest timeframe and then on a higher.

The principles of market energy

1. The market energy is always the path of least resistance. You can make a comparison with a river, which paves the way through the natural barriers.

2. Usually, this path is defined by an invisible structure. Similarly, the behavior of the river depends on the bed base structure. The formation is affected by the way you see the market.

3. The basic structure is amenable to change. Sometimes it seems like the majority of traders are trying to bail out all the water from the river by buckets, only to change the direction of its movement. Many people simply forget that it is possible to easily change the direction of the flow by removing a stone at the beginning of the river. That is to say that our view of the market can be always changed.

Since the market is a product of many minds, understanding, what leads to changes in prices gives a significant advantage in trading. Therefore, the Holy Grail is to want what the market wants.

Types of people

* Traders – feel best in the role of Columbus (conquerors). They have a penchant for independent thinking and action against conventional wisdom. Usually, brave leaders, who attract other investors.

* Crewmembers (Investors) – feel comfortable, following traders. The success of investors usually depends on the success of the leader – trader.

* Landlubbers (the savers) – people who are afraid to take on extra risk and liabilities, so invest in deposits and pension plans (common scheme in the US). Such people will not change the current state of affairs despite the unsatisfactory result.

Stairway to profit

Level – Novice. His goal is to get money at the same time acquiring new experience. During this phase, learning the basics takes place: how to place a deal, how to calculate margin and so on.
Level – Advanced Beginner. The goal is to make money gradually, using a small account.
Level – the Competent trader. The goal is to maximize the overall return on investment. A trader can already feel the “beat” of the market and determine which strategy is most appropriate for the current state.
Level – the Proficient trader. The goal is to trade in accordance with his own belief systems. Stability comes to the fore, and winning becomes the main objective.
Level – the Expert trader. The goal of an expert trader is to trade using his state of mind. At this stage, you have a full understanding of yourself and the market. It is no more a concept of randomness, but any chaos has a certain order.

The rules of the strategy

Any trading platform will suit for this trading system, as indicators of Bill Williams has long become standard in any terminal. The strategy can be used on any timeframe, but the author recommends the daily chart.

Profitunity system consists of indicators: Alligator, Awesome Oscillator (AO) and Fractals. Also pattern “Bar of Bull/Bear reversal” is used.

There are 3 signals for entry, each of which is called “Wise Man” by Bill Williams.

To enter, you can use any of the three types of signals, but the most important are the signals according to the bullish/bearish reversal bar and AO oscillator. Signals for entry on fractals should be better used only for refilling the position.

The Mighty Alligator

In fact, the alligator is just 3 MA‘s (moving averages).

Blue line – 13-bar MA with 8-bar shift. In fact, it displays where the price would be out of chaos. The value of the range between the jaws and the real price tells you about an interpretation of this new data by players.
Red line – 8-bar MA with the 5-bar shift. This line also shows the balance, but for a smaller timeframe. This timeframe is equal to about a fifth of the chart time period. That is, if you are trading on a daily chart, the line will approximately display the situation on the four-hour chart.
Green line – 5-bar MA with a 3-bar shift to the future. Again, the green line corresponds to about one-fifth of the teeth time structure (red line). That is, closest to the period of H1 or M30.

All three lines together: jaw, teeth, and lips form the mouth of an alligator.

Alligator is an expanded trend indicator. Obviously, in order to shift the blue line, more information is needed than to move the red or the green one. The system uses default settings of the indicator.

The First Wise Man – Bullish/Bearish Reversal Bar

The next part of the system is a bullish or bearish reversal bar. This is the first signal to enter a trade. Today, in order to achieve success in the market is not enough just to “buy and hold”, citing a book, you need to take into account the short-term desires of the market. Therefore, we will look for the earliest signs of a reversal trend.

Bullish reversal bar indicates a lower minimum relative to previous bars and closes above its midpoint. It says that at the beginning of the bar formation forces were on the side of the bears, but then the power went to the bulls.

In contrast to the bull bar, there is also a bearish reversal bar. This bar shows the new high and closes at its lower half. That is, at first the bulls ruled, but in the end, the bears won.

Bullish and a bearish reversal bar should be located at a significant distance from the Alligator lines. Also, the angle formed by the price should be greater than the angle formed by the jaws of an alligator. We sell below the minimum bearish reversal bar and set the stop-loss just above its maximum.

The same, but in reverse, is true for the bull market. We make a buy order a little higher than the bearish reversal maximum, put the stop-loss at a certain distance below the minimum.

The Second Wise Man – Awesome Oscillator

The next stage of the system – the AO oscillator. The indicator measures the momentum of the last 5 bars and compares this value with the last 34 bars. That is, the indicator displays the current power of the impulse.

The signal for topping up to the opened position are three consecutive bars of the same color of AO histogram. At the close of the third bar, we set a pending order just below the minimum candle and set stop-loss similarly to the first signal by the system – near the high of the same candle.

In his book “Trading Chaos” author advises to use this as an additional signal, that is, for topping up. However, if there was no reversal bar, we may well enter the transaction by AO indicator, but with a smaller lot size.

The Third Wise Man – Fractals

For the third signal in the classical strategy, fractals are used. Ideally, the upward fractal is, at least, five consecutive candles, where the highest high is accompanied by two lower ones on both sides. The same is true for the downward fractal, where the lowest low is accompanied by four bars with higher lows. In the case of upward fractals we are only interested in bars’ highs, in the case of top-down – only lows. Fractal does not have to consist of 5 candles, it forms can be quite different:

Next pending order we set on the opposite side of the alligator’s “mouth”. When the fractal appears, we set a pending buy order. It is important that at the time of execution, the order was behind the red alligator’s line. If a fractal works out, we also enter on the next fractals, until we make 5 orders. The stop-loss should be set at the low of fractal candle bar, or at the maximum of last 3-5 candles. Fractal can also be the first signal for the system if there were no signals by reversal bar and AO indicator. If it is the first signal, enter with the minimum lot.

What Happens When the Wise Men Get Together?

Now, when we understand what are the signals of all the three wise men’s, it’s time to gather them all together:

1. The signal of the first wise men is formed at a rather big distance from the alligator. We expect the appearance of a bullish or bearish reversal bar. The purpose of the first signal – to enter the market at the best price with minimal losses. Now, it is necessary to pay special attention to the presence of a steeper price inclination relative to alligator lines (good angulation), particularly regarding the blue line – the jaws;

2. After the market entry, we’re looking for a suitable place for topping up. If the market continues to move in our direction, we begin counting the bars in the AO histogram. After three consecutive bars of the same color appear (green for buy, red for sell), top up to the main position according to the MM system;

3. After the second signal we’re starting to search for the third entry point, that is, waiting for conditions for the fractal formation – two bars with lower highs and higher lows. The purpose of the third wise men is to simply follow the trend while it goes in our direction. When the fractal arises, we set a stop order just outside of the extremum and stop-loss at the lowest low or the highest high over the last 3 or 5 bars;

4. Continue to monitor the flow of new signals until the position size reaches its maximum size, in accordance with the MM (according to the book – 5 orders in total);

5. If the position was not closed by the stop-loss, we quit when an opposite signal arises (or reverse the position).

Exiting from the position

You should exit from the position at the appearance of the opposite signal. That is, wait for the appearance of reversal bar or three consecutive bars of the same color in the AO histogram.

Also, move the stop-loss following the price, behind the maximum/minimum of the last 3-5 candles.

Money Management and Inverse Pyramid

To calculate the position size Bill Williams recommends the following approach, which looks like an inverse pyramid:

Order – Lot X
Order – 5X
Order – 4X
Order – 3X
Order – 2X

The size of the positions is better to be set by not more than 0.5% of the deposit for 1X. For the lot size calculation, you can use a lot calculator.

Examples

Let’s consider an example with the GBPUSD on H4 period. As it has to be, when a bullish reversal bar appears, we set pending buy order just above its maximum. As you see it in the above chart, the signals numbered 1 and 2 appeared to be false and closed by stop-loss.

After opening a position, we’re waiting for the appearance of green three bars by AO and set a pending buy order a little higher than the maximum of the current candle. Once the trend reversed, we top up at the fractals breakdown until we make 5 orders.

When you see a bearish reversal bar, close the position at BUY and immediately open a SELL order at the minimum of the reversal bar. As you can see, despite the fact that we could enter the position only from the third attempt, the profit from the captured movement covered the losses of the two previous transactions.

Next, using the Sell Stop orders, we top up when the signal by AO appears and the minimum fractal is broken down. We leave the same way – with the appearance of the return signal (in this case, bullish reversal bar).

Conclusion

Despite the fact that the original strategy was to follow the trend, then the enters became much earlier, literally at the first sign of reversal. According to the author, these changes are related to the fact that the markets today have become much more mobile, and therefore require a more aggressive approach.

At the same time, one of the main advantages of the strategy is that even having caught a few consecutive stops, the loss is more than covered with a much larger profit from the trend movement.

The only weakness of the system, in my personal opinion, is its entrance. However, in this case, the use of additional filters may help. Also, at the entrance do not forget to take into account the levels of support and resistance – it’s silly to go straight into the level direction. In fact, markets are exchanges of emotional energy, and the energy takes its final shape in the form of money. Therefore, psychology still has the leading role, and the system and technical/fundamental analysis go by the wayside.

Take care, Michael

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