Bill Williams Awesome Oscillator (AO)

About Bill Williams Chaos Theory

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 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-realization 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:
  • Fractal (phase space)
  • Momentum (phase energy) - Awesome Oscillator
  • Acceleration / Deceleration (phase force)
  • Zone (phase energy / force combination)
  • Balance Line (strange attractors)
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.

About Awesome Oscillator (AO)

Awesome Oscillator (AO) determines market momentum (the second of five market dimensions) at a given time on the last 5 bars, comparing them to the momentum on the last 34 bars. It simply presents the difference between the 34-period and 5-period simple moving averages of the bar's midpoints (H+L)/2. It was developed by Bill Williams as part of his Chaos Theory (Profitunity System), a well-known trading system, whose indicators are available in almost any trading platform.

Awesome Oscillator (AO) is displayed on the chart as a histogram:

Awesome Oscillator generates three buy signals and three sell signals, but we do not use them until the first fractal buy or sell signal is triggered outside the Alligator's mouth.

First signal

Awesome Oscillator Saucer buy signal is generated when the histogram which is above the zero line changes its direction from down move to up move. 

Histogram “a” bar, of any color, should be higher than histogram “b” bar. Histogram “b” bar must be red. Histogram “b” bar (signal) must be green.

Once the signal has been generated, place a Buy Stop one tick above the high of the price bar that corresponds to the histogram “c” bar.

The most recent saucer signal cancels all previous ones (do not forget to delete pending orders after the signal is cancelled). Bear in mind that we buy only if the current histogram bar is green and we sell only if the current histogram bar is red.

Awesome Oscillator Saucer sell signal is the opposite of the Awesome Oscillator Saucer buy signal.

 Second signal

A buy (sell) signal is generated when the histogram crosses the zero line from negative to positive territory:

Place a Buy Stop (Sell Stop) one tick above the high of the price bar (below the low of the price bar) that corresponds to the first bar that crosses the zero line.

If there is a buy signal, histogram “b” bar (a signal one) is green, if there is a sell signal it is red.

Third signal

... is called the Twin Peaks buy (sell) signal. It is generated when the histogram is lower (higher) than the zero line, and the last indicator's bottom is higher (last indicator's top is lower) than the preceding one. Between these two bottoms (tops) the histogram can never be higher (lower) than zero:

The Twin Peaks buy signal is the only buy signal that is created below the zero line. Similarly, the Twin Peaks sell signal is the only sell signal that is created above the zero line.

Place a Buy Stop (Sell Stop) one tick higher than the top (lower than the bottom) of the signal bar. In the case of a buy signal, histogram “C” bar (a signal one) is always green, otherwise it is red.

Never buy on a red histogram bar and never sell on a green one. If an “unfriendly” histogram bar occurs before the execution of a pending order, which was placed in the direction of the Awesome Oscillator signal, the signal has to be ignored and the order has to be deleted.

Sources and Additional Information:

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