Areas of market consolidation near the resistance and support levels and how to use them in trade.
Trading strategy: three wise men and the alligator
Traders are not only hot-tempered and enthusiastic people, but they are also very creative people. Their creativity is manifested in the names of the trading strategies. Today’s strategy justifies this observation.
The Profitunity trading strategy was created by very experienced traders Bill Williams (the author of “Trading chaos” book as you might remember) and his daughter Justine. It’s commonly known as “The three wise men and the alligator” strategy. You must be wondering why it’s called like that. Here is why.
The Alligator is a combination of three moving averages:
The lips: smoothed MA of 5 periods, displaced three bars forwards;
The teeth (red line): smoothed MA of 8 period, displaced 5 bars forwards;
The jaw (blue line): smoothed MA of 13 period, displaced 8 bars forwards.
Usually, when there’s no trend, these three lines are bundled together; at this state, the Alligator is sleeping. Then, it wakes up and becomes hungry (the three line begin to diverge resembling the opened chaps of the alligator). If Alligator becomes hungry, it means that we are facing with a downtrend/uptrend. Traders are watching for this “hungry time” to catch the big trend. Once the chaps of the alligator close, buyers/sellers consider taking a break or reduce lot size.
So, let’s move further and acquaint ourselves with Three Wise Men.
The first wise - a divergent bar
The first wise man will help us to determine the reversal in a ranging market. You should find a divergent bar (morning or evening star patterns).
You should open long position if you notice that the price is below the Alligator lines; the divergent bar must have the lower low than the previous bar; the divergent bar must close on the upper half of the bar. Buy stop should be placed at top of the bar; stop loss should be placed at the bottom of the bar. Take profit – when opposite signal appears.
The second wise man - the Awesome oscillator
The awesome oscillator is a supplementary condition for identification of our entry points. Ideally, it is preceded by the bullish divergence bar, or by a down fractal. You can buy when the AO shows three consecutive 3 green bars. Stop should be placed at the bottom of the bullish divergence bar or down fractal, then gradually trail up to the latest 3-5 bars low, or when the “bearish” signal appears.
The third wise – the fractals
Fractals help to identify breakouts on previous high or low. According to Williams, each fractal represents the end of an Elliot Wave and a breakthrough of each fractal marks a new impulsive wave.
The Profitunity signal: when the wise men gather together
Firstly, look if the first wise man is formed above/below the alligator’s lines. Then, wait for the “bullish”/” bearish” pattern to appear. Once you’ve entered the market, look at the second wise man – the Awesome Oscillator (there should be three consecutive green/red lines). Then, we address to the third wise man – wait for the formation of fractal – two bars with lower minimums or higher maximums. Once the fractal appeared, you should place the stop-order after the high/low and the stop-loss at the lowest minimum or the highest maximum.
You should exit the market if the opposite signal appears – when the reversal pattern appears or when there are three similar consecutive bars on the histogram of the AO.