Bill Williams Breakout Strategy

Bill Williams Breakout Strategy - Small Losses, Big Gains

The following strategy was created solely based on Bill Williams indicators. It makes use of three of the Chaos Theory indicators, which will give us essential technical market analysis. It works on any pair and any timeframe, however, I like to use smaller timeframes in order to keep my stop losses low and enter and exit the market quickly.

THE INDICATORS 

Awesome Oscillator - Momentum

Determines market momentum at a given time on the last 5 bars, comparing them to the momentum on the last 34 bars. 

Fractal Lines - Breakout

A buy fractal is a series of five consecutive bars where the highest high is preceded by two lower highs and is followed by two lower highs. The opposite would be a sell fractal. Fractal Lines indicator - which comes with Dukascopy JForex - makes it easier to detect and analyze fractals. 

Alligator - Trend Direction

Bill Williams described the Alligator as being a compass, helping to spot the trends and ranges.

ENTRY RULES 

Awesome Oscillator is near zero - which means there is no momentum

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Alligator is closed and tight and inside the Fractals lines - no trend is defined

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Fractal Lines are broken - it marks the entry to the side the channel is broken

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Stop losses are placed on the other side of the lines

STOP LOSS

TAKE PROFIT There are several ways to take profit: 

If buying: When a candle closes below the lips of the Alligator (green line)

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If selling: When a candle closes above the lips of the Alligator (green line)

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Candle trailing: after a strong move composed of several candles, wait for two candles to close on the opposing direction of the trend

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Trailing stop based on the ATR (Average True Range)

Buy/Long Example:

As you can see from the image above, Awesome Oscillator is near zero, the alligator is closed and inside the fractals lines. When a candle breakouts from the fractals line the entry is activated - marked with a green arrow. The first red arrow marks a possible exit by using candle trailing and the second red arrow marks another exit, since price closed below the lips of the Alligator. As you can see from the example, the stop loss is about 3 pips and the exits are 18 and 21 pips. That is a risk reward of 1:6 and 1:7, respectively.

Buy/Long Advanced Entry Example (dual timeframe): In this example we'll be using two timeframes (5 minutes and 1 minute) to confirm the entry. The higher timeframe will give us the trend direction and the smaller timeframe will give us the precision entry. The following picture is EUR/USD in 5 minute timeframe:

The Alligator is clearly marking an uptrend, since its lines are wide open.

Now, we just need to wait for a breakout on a smaller timeframe - EUR/USD 1 minute timeframe - in order to make our entry. We'll be entering on the trend pullback:

Once again: Awesome Oscillator is near zero and Alligator is inside the Fractals Lines. The Fractals Lines breakout indicates our entry. But, this time with the confirmation of the 5 minute trend. The stop loss is 5 pips and the possible take profits are 15 pips (first red arrow) and 10 pips (second red arrow). The risk:rewards are 1:3 and 1:2, respectively.

TIPS 

Do not enter on every trade you see, wait for those with a small stop loss. Sometimes you may see that the conditions are met, however, the stop loss is very big. Those trades are risky and can possibly reverse very soon.

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By using a small stop loss you can assure a better risk:reward ratio.