Table of Contents:

  1. Start HERE!
  2. Chart Indicators
  3. Degrees Defined
  4. Elliot Waves
  5. Entry/Exit Strategies
  6. Fibonacci is the “Key”
  7. Money Management
  8. Retracements & Projections
  9. Step-by-Step Trading
  10. Trading Chaos
Page last updated: September 9, 2017 @ 16:39

 

 

 

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Trading Chaos

The Three Wise Men are 3 entry rules created by the Profitunity Trading Group, as described in the 1st & 2nd Edition of Trading Chaos by Bill Williams.

Before the Three Wise Men: The Alligator

An indicator must be mentioned first: the Alligator. The reason is that the Three Wise Men is nothing more than entry rules. You should also understand the philosophy behind the system, and nothing captures the Profitunity trading philosophy better than the indicator of Alligator, which actually is also invented by the Profitunity Trading Group.

Definition and facts

The Alligator is a collection of three moving averages, which are called the Lips, the Teeth and the Jaw and colored green, red and blue.

  • The Lips (Green): smoothed moving average of 5 period, displaced 3 bars forward.
  • The Teeth (Red): smoothed moving average of 8 period, displaced 5 bars forward.
  • The Jaw (Blue): smoothed moving average of 13 period, displaced 8 bars forward.

How the Alligator works

The idea of the Profitunity trading strategy is to catch those big trending movements that occur for less than 40% of all time. Such moments can be identified by looking at the Alligator Lines.

Alligator Lines

Alligator Lines

Usually, before a big move happens, the price moves in a tight range and intertwines with the Alligator Lines. This is called a “sleeping alligator” because it is so quiet. Then it explodes into a big move. The price starts moving away from the Alligator, and the Alligator Lines are opening. This phase is dubbed the “hungry alligator” because it looks like an alligator wakes up from sleep and opens it mouth (distance between the lines) to chase the little fish (price bar) for breakfast.

In short, we are trying to catch the big trend which usually follows a quiet range, and it is pretty much how all other trend following systems under the sun work. Conversely, when a trend starts to die out and starts moving in a range, we might consider taking a break or reduce lot size.

The Three Wise Men

In order to understand them, you must have the following indicators on your charts:

  1. Alligator (as described above)
  2. Awesome Oscillator (details below)
  3. Fractals (details below)

All are available in many charting softwares.

 

 

 

The First Wise Man: Divergent Bar

Definition and Facts (long)

  1. The price is below the Alligator Lines.
  2. The Divergent Bar must have a lower low than the previous bar.
  3. The Divergent Bar must close on the upper half of the bar.
  4. The flatter the Alligator and the further away the bar, the more reliable is the signal.
  5. Opposite for short entry.

Entry and Exit (long)

  1. Buy stop at top of the bar.
  2. Stop loss at the bottom of the bar.
  3. Take profit when opposite signal appears, or trail stop to 3-5 bars low.
  4. Opposite for short entry.

 

The Second Wise Man: The Awesome Oscillator (AO)

Definition and Facts:

  1. The difference between a 5-period and 34-period median price moving average, which is actually the 5-34 MACD histogram.
  2. Bars that are higher than the previous one are painted green, otherwise painted red.
  3. Available in many technical software packages.

Entry and Exit (long):

  1. Ideally it is preceded by the bullish divergence bar, or else must be preceded by a down fractal.
  2. Buy when the AO shows three consecutive green bars.
  3. Stop begins at the bottom the the bullish divergence bar or down fractal, then gradually trail up to the latest 3-5 bars low, or when a bearish divergence bar appears.
  4. Opposite for short entry.

 

The Third Wise Man: The Fractal

Definition and Facts:

  1. An up fractal is a high of a bar preceded by 2 lower highs and followed by 2 lower highs.
  2. Signal of an up fractal is only valid if it is above the Alligator lines.
  3. Vice versa for a down fractal.

Entry and Exit (long):

  1. Buy on breakout of a valid up fractal (above Alligator).
  2. Stop begins at the bottom the the bullish divergence bar or down fractal, then gradually trail up to the latest 3-5 bars low, or when a bearish divergence bar appears.
  3. Opposite for short entry.

For advanced traders, there are “Trading Chaos” signals other than fractals, but every position requires to start on a fractal (buy/sell) signal.

For AC signals, you must always have a change of color first for the signal to be valid. What I mean is if you determine an AC (buy/sell) signal while within a trading position, the AC bar needs to change from Green to Red (or Red to Green) before you can validate the signal.
AC is the most sensitive indicator. It will forecast future price changes long before the price even changes. With your scan, always look at the AC first. Then the AO and finally the TDROsc.

To create a buy signal above the zero line, you need 2 consecutive green bars after a color change. To create a buy signal below the zero line, you will need 3 consecutive green bars after a color change.

To create a sell signal below the zero line, you need 2 consecutive red bars after a color change. To create a sell signal above the zero line, you will need 3 consecutive red bars after a color change.

Do all that and you won’t know where to put all the profits you will have captured.

For AO signals these three are the easiest and most profitable signals “The Cross”, “Twin Peaks” and “The Saucer”.
 


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