0 Chaos Theory the Forex Strategy

It’s important to understand the meaning of chaos in order to understand correctly Bill Williams' Chaos Theory. Traditionally chaos is considered tobe a disorderly structure, though in fact it is much higher level of order.Chaos is permanent, but stability is temporary. Financial markets result from chaos.

Bill Williams developed unique trading concepts by combining trading psychology with the Chaos Theory and its particular effect on the markets. He suggested that rewards from trading and investing are determined by human psychology and that anyone can become a profitable trader/investor if they uncover hidden determinism in seemingly random market events.

Bill Williams says that fundamental or technical analysis can not guarantee steady profitable results because they do not see the real market. Moreover, Bill Williams says that traders lose because they rely on different types of analysis,which are useless in nonlinear dynamic models, i.e. the real markets.Trading is a psychological game, the way of self-realization and selfknowledge,so the best way to become successful is to find your trading self, to get to know it better and to follow it no matter what. Thus, there are two significant aspects: self-knowledge and understanding of the market structure.

It is Bill Williams' view that making money can be easy if you understand the market structure. In order to do this you should be aware of the market's inherent parts called dimensions, each of which adds to the total picture.

These market dimensions are:
1. Fractal (phase space)
2. Momentum (phase energy) - Awesome Oscillator
3. Acceleration / Deceleration (phase force)
4. Zone (phase energy / force combination)
5. Balance Line (strange attractors)
It is worth mentioning that before the first dimension (Fractales) generates a signal, all signals generated by other dimensions should be ignored. Once the position is open in the direction of the first fractal signal, the trader “adds-on”to this position every time a signal from other dimensions is generated. As a
result, a 30% market movement gives the opportunity to make a profit of 90-120%.

Bill Williams' method to exit the market is very sensitive to price movements,so it helps to fix profit within the last 10% of the trend, capturing not less than 80% of the movement. Bill Williams' theory has become very popular among Forex traders.


Source: Forex Killer

0 Trend Indicators

Moving Average

Moving average is the average of prices over a specified number of periods. It is a smoothed correlation between currency rates and time periods. The time period of any moving average defines how much it will be smoothed. For example, when a Moving Average is calculated by adding the closing prices for the last 5 bars, then it is defined as a 5-period MA.

Simple Moving Average — SMA:
SMA = (P1+P2+P3+….+Pn) / n
P= Price — price of i-bar. Usually closing prices are used.
n — MA period. This is a number of bars on which the indicator is calculated.
The main disadvantage of SMA is that it counts the price twice, when it is received and when it leaves the area of calculation. That is why improved variants of the indicator should be better used.

Weighted Moving Average (WMA):
WMA = (w1*P1+w2*P2+w3*P3+….+wn*Pn) / (w1+w2+w3+…+wn) wi — the so called weight or coefficient which is assigned to every price. The closer the price to today the larger coefficient is assigned.

Exponential Moving Average (EMA):
EMA(t) = EMA(t — 1) + (K x [Price(t) — EMA(t — 1)],
where t — current time period (current bar),
t — 1 — previous time period (previous bar),
K = 2 / (n + 1),
n — EMA period.

The main advantage of the Exponential Moving Average (EMA) is that it discounts both prices of the previous and current periods. Every subsequent value becomes more significant. MA length is better to choose for every specific instrument on which you trade and for every specific chart scale.
Some traders believe that it is better to use Fibonacci figures. For example, the following ones.

How to analyze Moving Averages:
If the price line crosses the Moving Average line from below, then this is a signal to buy. If it crosses from above, then it is time to sell.

The first method gives many false alarms as markets become faster each year.
That is why cross-points of two Moving Average indicators of different periods
are used (n1 and n2);

Moving Average indicators of a greater period may specify the trend themselves. When the value of the indicator is more than 40 it becomes less sensitive to price movements and indicates only the general direction of the movement (Trend);

The points of the most significant divergence of MA and the price chart indicate that the market is overheated greatly and correction is possible.Moving Average signals are more effective on a trend market and less effective when the market is flat. As MA is a lagging indicator, it gives many false alarms.


Source: Forex Killer