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Bill Williams Chaos Theory

Overview

Bill Williams developed his unique theory by combining trading psychology with the Chaos Theory and their effects 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.

Williams says that fundamental or technical analyses (link to 4.4.2.1) cannot guarantee steady profitable results because they do not see the real market. Moreover, he 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-realisation and self-knowledge, 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:

It is worth mentioning that before the first dimension (Fractals) 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%.

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.

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