Let’s quote the classic who was the first to find out the 5 magic bullets that kill most trends. That is what Bill Williams wrote in Chapter 9 of his book “Trading chaos”:
The key to "making a killing" in the market lies in the ability to know when a trend is over and when the next trend is starting. In Chapter 7, we introduced five magic bullets and mentioned when they are present, the odds are heavily in favor of a trend's being over. These bullets are:
1. Divergence. There must be a divergence between wave 3 and wave 5 (see Figure 9-4). If the market is going down, the price at the end of wave 5 must be lower than the bottom of wave 3 and the Profitunity oscillator must be higher at the end of wave 5 than it was at the end of wave 3.
2. Price in the target zone. (The technique for projecting this target zone is found in Chapter 7.)
3. A fractal at the bottom (top).
4. A squat bar in one of the three bottom (top) bars.
5. A shift in momentum from down to up (up to down, in a bull market). (See Chapter 7.)
Once these five magic bullets show up, you assume that this is a Point Zero. Your situation would be:
There is divergence between wave 3 and wave 5. The price is in the target zone. This divergence is measured in a time frame in which the Elliott wave you are counting occupies between 100 and 140 bars. A fractal has developed. A Squat bar is on one of the three bottommost (topmost) bars. There is a change in direction of momentum as measured on the Profitunity 5/34/5 MACD. When you see all five of these bullets, you can begin your count with confidence.
At Point Zero, we expect a sharp rally of the bottom (Figure 9-5). We move down during at least one significant time frame. If the trading time frame is a daily bar, we would examine a 60- or possibly a 30-minute bar. We are looking for a smaller degree five-wave impulse in the new direction. As this rally begins to lose steam (usually with an up fractal) and starts to pull back, we want to be ready to place our first trade in this sequence.
(End of quote)
It is one of the key Forex problems. There is nothing more horrible for a trader to enter the market at the end of the trend when the moving averages are unfolded in the direction of the trend (confirming the trend) and the news releases don’t hint at any problems. Traders psychologically (at the subconscious level) get used to trading with the trend adding new positions (deals). It can be dangerous.
I guess all traders read Bill Williams. But most of them still lose their money after that. It means that the 5 bullets are not enough to make a clear confirmation of a trend reversal. The price is not going to stand still. If it doesn’t go with the current trend it will go against it. One of my students confessed to me that those extra bullets found by me in addition to those found by Williams helped him to stop making mistakes and to not lose even in most complicated situations thanks to the knowing these criteria.
Williams’ Alligator. The way to improve what brings traders profit only in half of the cases.
The analysis of the technical indicator called the Alligator that is a built-in tool in any trading terminal is available for self-study here . Read what the author wrote about his creation in his book called “New trading dimension:”
Here is our basic strategy: we want to wait for the trend to prove itself by giving us a fractal that is above/below the Alligator's mouth… After the first fractal breakout has been triggered, we take any and every signal from all five dimensions in that direction. For example, if the price is above the Alligator's mouth, we would only take buy signals and would not go short. We would have profit-protecting stops trailing the up move. On the down side, we would only take sell signals below the Alligator's mouth and would only buy to exit a position, not to go long… Our trading strategy is to not trade until the first fractal breakout outside the mouth…
This indicator helps us to cut off most of the flat zones and makes us much more happy traders. A little bit of patience is needed to master the few signals that indicate the moments of entering the market . (End of quote)
Is everything really such simple and clear? Then answer the question, please: why do 90% traders, most of which use that very indicator, lose their money on Forex? Now, let us closely examine the picture that is given below.
Pic. 34. Taken from
According to Bill Williams’ instructions, even this picture contains at least 4 potential entry points. But any and each of these market entries would be in the wrong direction. Although, I’m strictly following all the instructions for the indicator:
· The Alligator’s mouth reversal
· Fractal above/below
· Enter the market 1 point above (below) the fractal in the direction of the open Alligator’s mouth, lips and jaw.
As a result, we have negative profit. I hope that I have explained what can happen to your deposit if you strictly follow the given instructions.
Pic. 35. GBPUSD 6.05.2005. 15-minute chart at 14.15 Moscow time (MSK). The price is 1.9009.
It should be a starting point for an upward flick, especially as Alligator’s mouth was open upwards and the degree of the opening was stronger than on the picture above (as we can see the moving averages of the Alligator’s lips, teeth and mouth were smoothed down). Can you imagine how many traders have already opened “BUY” positions at that point? Moreover, Bill Williams’ (AO) Awesome Oscillator (which, according to the author, literally provides the “keys to the kingdom” as it is easy-to- understand and easy-to-use) was also in favor of “buy position”. If a divergence and a two-peak pattern appeared on the chart the Awesome Oscillator could even cross the zero line. But now you cannot see it on the picture as the rapid downward motion brought the AO line down changing the color of the candlestick from white to red.
Do you know what color was the preceding bar (at 14.00) according to the MFI indicator? It was a squat one.
Do you know what color was the bar at 14.15 under the MFI indicator? It was green and “authentic”.
Let’s sum up what we have said:
All the 5 criteria of a trend reversal that Bill Williams pointed out in his book “Trading Chaos” do not work even if they are drawn together.
I can make tens and even hundreds of examples. You can do it yourself. Open the history charts in your Metatrader-4 trading terminal. Closely examine them. There is no doubt that you will find tens of examples when all the 5 criteria are present but the price still doesn’t go in the direction it should (even must) go (even fly) according to Williams. Every trader dreams of entering the market at the beginning of the trend to get the maximal profit possible.
Williams’ method gives you almost equal win-lose chances. It is like tossing a coin to look whether it is heads or tails. Yes, maybe it sounds rough. But at least it is fair. Too many people lost their money following Williams’ method without thinking them over. Try to figure it out for yourself: almost all the traders use one of the following 3 indicators:
· Williams’ Alligator
· Ichimoku Kinko Hyo
· Moving Averages
Usually MACD and some extra indicator are added. As a result, 90% of the Forex traders can lose. And you don’t want to comfort yourself by the thinking that if you switch the chart to a bigger timeframe it will save your deposit and will be the universal panacea.
Pic. 36. GBPUSD 29.04.2005. 1-hour chart. The price is at 1.9164, then a reversal at 1.9158. The price rate of the British Pound changed by just 6 pips. I hope those who use 1-hour charts in their trading do not consider 6 pips (almost equal to spread) to be a worthy reward.
Pic. 37. GBPUSD 20.04.2005. 1-hour chart. The point at the bottom at 1.9095 is followed by the downward reversal of the Alligator’s path, 25 pips below the preceding fractal, after that a rapid upward motion up to 1.9220 (it is 125 pips).
Nobody here is going to say that GBP/USD is unpredictable. Yet if you use the AO to trade EUR/USD it would be another story.
EUR/USD example:
Pic. 38. EURUSD 22.04.2005. 1-hour chart. The point at the bottom of 1.3094 is followed by the upward reversal of the Alligator’s path, 16 pips above the preceding fractal, after that a rapid downward motion. The price changed by 140 pips.
I’m not going to convince anybody of anything. No more. Life and work will put everything in its place. Those who studied at various courses with dealing centers, business schools and academies will sooner or later finish off their deposits using Williams’ Alligator. There are too many people that I retrained after they had been given honors diplomas of various prestigious educational institutions. The instructors made them believe that they had all chances to succeed in Forex trading. Of course they lost. I hope that I managed to explain to you the way it can be done very easily.
By the way did you notice that Williams’ second book “New trading dimension” as opposed to “Trading chaos” doesn’t stand high in traders’ esteem, including the admirers of his talent.
Do you think it is a coincidence? I think it’s not. Let me share with you a few of my thoughts:
It is in “New trading dimension” that Williams started as a psychotherapist to make zombies out of the readers by showing the infallibility of his methods. By doing that he tried to make up for the “vapidity” and the “philosophy” that his book is soaked with.
Please read attentively and without bias what the author HIMSELF writes about his indicators:
The Awesome Oscillator (AO) provides the “keys to the kingdom” when AO is properly understood.
You can make profit using only this indicator. You can even stop worrying about the current price rate. For example, when the indicator turns downwards (the last bars turn green, not red) you just call your broker and say: “Sell at the market”. If using the AO is like reading tomorrow’s number of “Wall Street Journal” then using the AC is like reading the-day-after-tomorrow’s number.
(End of quote)
How do you like it? I want to clarify one thing: It was not me who wrote that. It was Williams.
The reasons why I wrote my book:
· Being a psychotherapist Williams used the forbidden methods of manipulating. What I quoted is only a small part of self-praise in his books.
· Williams’ methods can be trusted only in HALF of the cases (by the way quite reliable) but none of the analysts could define when they are reliable and when they are not. In what cases we can make a profit and in what cases it is better to not use them or to open positions in the opposite direction.
· These zombie methods are extremely efficient. There are a lot of forums on the Net where you can read how Williams’ admirers worship his idol not paying any attention to the obvious imperfections of his methods and indicators. By the way they created an idol with his help.
· If only 1 out of 20 traders (as I mentioned above) earns money at Forex using Williams’ methods (Williams’ statistics from “Trading chaos” is even worse - only 3% win, the rest lose) will it be fair to raise the question : “What did Williams not tell traders about Forex? ”
I wrote this book because I want any trader to not look at Williams with a sinking heart as though he is some kind of God or idol. I want the trader to look at him with calm, objectivity and without bias remembering the ancient saying: “To err is human”. And for the trader it will be the first psychological step towards the success at Forex. The second step will be the clear understanding of WHERE Williams’ methods work perfectly and WHERE they yield a loss. Right now I’m going to give you one of the prompts. Just add a 233 moving average (233 is a Fibonacci number, even though many analysts including Dow Jones use a 200 one) to the same chart where the Alligator is set. Well, what good is it? It gives clear and objective criteria of what is the type of the current trend.
If on H4:
1. The Alligator is above the 233 MA, the upward opening of the Alligator’s mouth on smaller timeframes will be firm and rapid as the motion will go with the uptrend thus forming one of the trend waves.
2. The Alligator is below the 233 MA, by analogy every downward motion can be applied to the downtrend. Yet in spite of any price raises (for example, after some news releases) it will CONSTANTLY be pulled down because of the downtrend.
3. The trend will change(reverse) only :
· When the Alligator completely gets to the opposite side of the 233MA (For example, from bottom to top) making a fractal at the top.
· When after the pullback downwards the price didn’t reach the starting point. If a new rapid upward motion follows the mentioned pullback and if the level of the newly-formed fractal at the top is crossed the new upward motion will be 1.6 of the first wave which coincides with the Alligator’s going over the 233 MA. In this case Elliot waves will start unfolding in an upward direction on different timeframes.
· And you will be constantly spotting Elliot wave 3 (which according to Williams is suitable for making good profits) on m5, m15, h1 charts. Then wave 3 will start unfolding on H1 and you will see another set of waves on m5, m15 and so on.
Conclusion: a strong movement will start when the directions of the trends on small and large timeframes (direction in which the Alligator opens its mouth) coincide at the same time. Then you can fully trust Williams’ methods that we have just talked about (i.e. the Alligator’s mouth turn, a fractal above/below in the direction in which the Alligator opened its mouth, then a position can be opened 1 point above the fractal at an uptrend or below the fractal at a downtrend). Note: I enter the market 4 points (not 1 point) above the fractal because native dealers can shift the quotes by some pips in comparison with the quotes that the Consortium of the Banks gives. Open the trading terminals of different DCs and you will see how the peaks and the bottoms do not correspond by a couple of pips.
On the other hand, such opening of the Alligator’s mouth IN THE DIRECTION OF THE TREND gives at least from a couple of tens to hundred pips (depending on the currency pair’s volatility… the British Pound has stronger volatility than the New Zealand Dollar). That is why enter the market 3 pips further during such movement is absolutely reasonable. It is terrible when a trader enters the market after the price changed by 50-100 pips above/below the fractal and the Alligator opened its mouth because the pullback (correction) can start any minute.
And vice versa, the Alligator will be constantly cheating you when the direction of the movement during the trading session doesn’t coincide with the general weekly (monthly) trend (e.g. on H1-H4 the Alligator has its mouth opened upwards and on M5 it is opened downwards). As a result we will get a flat and those who placed their orders 1 pip above the fractal will see the price going against all Williams’ recommendations. If you opened a position looking just at H1 chart in this case M5 will show you that the movement is a pullback from the uptrend on H1-H4. In 99 cases out of 100 you will get a profit from such a deal. But do you want to have a 50-pip or 100-pip “minus” with the opened position fraying your nerves? Isn’t it better to buy “FROM HERE” having spotted the fractal on H1? If you opened a position looking just at M5 chart when the Alligator’s mouth is opened on H1 in the opposite direction then you entered AGAINST the trend. The consequences are obvious. This is just a pullback from the trend (in this case it is an uptrend). The ABRUPT movement FOLLOWING THE TREND can start any second.
Let me remind you:
Blue line (the Alligator’s jaw) – a 13-bar smoothed moving average offset 8 bars into the future
Red line (the Alligator’s teeth) – a 8-bar smoothed moving average offset 5 bars into the future
Blue line (the Alligator’s lips) – a 5-bar smoothed moving average offset 3 bars into the future
You can discuss the chapter with the Academy members who study the SBP techniques created by Masterforex-V by following the link
Part I - Delusions of Forex Market (typical error 97% losers traders: how and what to change on the way to success in Forex) >>
Chapter 6 - Technical levels of support and resistance in Masterforex-V Trading System. >>
Chapter 7 - Moving averages: The basic Forex indicator. >>
Read more
Chapter 9 - Trading on news. Features of trader's work on Friday at American session. >>
Part 3. Forex investment funds >>
Book 2. Technical analysis of Forex in the Masterforex-V Trading System >>
Book 3. Masterforex-V “Points of opening and closing of positions at the Forex market (basic course)" >>
