Bill Williams Indicators
Bill Williams was born in 1932 and traded the commodity markets successfully for over 50 years. He later became a trading educator and the author of multiple books on trading psychology, chaos theory and technical analysis in the financial markets. He also developed his own proprietary indicators that are now extremely popular and available on most trading platforms.
These indicators include:
- Accelerator Oscillator
This is a histogram-based oscillator that shows the rate of acceleration or deceleration of price in the market.
The Alligator indicator is designed to inform traders of the absence of an underlying trend as well as the formation and direction of a new one.
- Awesome Oscillator
The Awesome oscillator measures the momentum of the underlying trend and also helps in confirming trends as well as warning of potential reversals.
The fractals indicator plots local highs and lows where the price may potentially stop and reverse, or even breakout.
- Gator Oscillator
Intended to supplement the Alligator indicator, the Gator indicator helps in confirming trends and warning of decreasing momentum in the market.
- Market Facilitation Index (BW MFI)
The BW MFI is intended to show the strength or weakness behind any price movement in the market.
The Awesome Oscillator is simply a 34-period moving average subtracted from a 5-period moving average. Its awesomeness is that the moving averages are plotted using the median prices of candlesticks. The indicator falls in the broader category of momentum oscillators, which includes other indicators such as the RSI, Stochastics and MACD. Please read our separate dedicated guide on Awesome Oscillator trading strategies.
The Accelerator Oscillator is based on the Awesome Oscillator. The indicator measures the difference between the Awesome Oscillator and its 5-period simple moving average. This means that it shows how the Awesome Oscillator accelerates or decelerates.
By getting information on how the rate of price momentum in the underlying market changes, traders can determine when to take advantage of trade opportunities in the market as well as when to avoid potential false movements.
Functionally, the Accelerator Oscillator will change direction before the price changes, acting as an early warning sign for momentum acceleration or deceleration.
The formula to calculate the Accelerator Oscillator is as follows:
Accelerator Oscillator = AO – SMA (AO, 5)
AO = Awesome Oscillator
SMA = simple moving average
The Accelerator Oscillator is also plotted as a histogram that prints green and red bars, and also swings above and below a zero line. A green bar implies increasing acceleration, whereas a red bar implies increasing deceleration.
When the indicator is a zero, it means that momentum and acceleration are balanced. The Accelerator Oscillator is essentially a leading indicator that helps traders to eliminate poor entries.
Other types of leading indicators include On-balance Volume and Donchian Channels.
Trading with the Accelerator Oscillator
Unlike the Awesome Oscillator, when trading with the Accelerator Oscillator, a cross above or below does not signify a change of market sentiment (bullish or bearish).
Still, traders should place buy orders when there are two consecutive green bars above the zero line. If you wish to go long below the zero line, you should wait for a third consecutive green bar because you will not be trading with momentum on your side.
Similarly, you should place a sell order after two consecutive red bars are printed below the zero line. Sell orders above the zero line can only be placed after three consecutive red bars are printed.
The Alligator indicator is composed of three smoothed moving averages projected into the future by several periods. The indicator is specifically purposed to ensure that traders only place their trades in optimal trending markets.
It is aptly named ‘alligator’ because it mimics the feeding habit of the animal and can help traders pick out the best times to ‘feed’ on the pips available in a trending market.
Here are the lines that constitute the Alligator indicator (as well as their calculation):
- Alligator’s Jaw
This is a 13-period smoothed moving average (SMMA), plotted using median prices, and is projected 8 bars into the future. This line is typically visualised in blue.
Alligator’s Jaw = SMMA (median price, 13, 8)
- Alligator’s Teeth
This is an 8-period smoothed moving average, plotted using median prices, and is projected 5 bars into the future. This line is typically visualised in red.
Alligator’s Teeth = SMMA (median price, 8, 5)
- Alligator’s Lips
This is a 5-period smoothed moving average, plotted using median prices, and is projected 3 bars into the future. This line is typically visualised in green or black.
Alligator’s Lips = SMMA (median price, 5, 3)
Trading with the Alligator Indicator
When the lines are intertwined or converging, it implies that the market is ranging (the ‘alligator’ is sleeping). The longer the alligator sleeps, the hungrier it will wake up; prolonged consolidation will imply a massive breakout.
The alligator’s lip will be the first to move (crossing above or below the jaw) when it is waking up, which denotes the beginning of a new trend.
An upward movement implies an uptrend might be forming, whereas a downward movement implies that a potential downtrend is starting.
A trend will be confirmed when the alligator’s teeth cut through the lips. This will be the signal to buy in a confirmed uptrend or to sell in a confirmed downtrend.
The signal to book profits will come when the lines start to converge again, which will mean that the alligator is now about to repeat the sleep cycle.
The Gator Oscillator is based on the Alligator indicator. It is designed to show the degree of convergence or divergence of the Alligator lines.
The indicator is plotted as a double histogram. The histogram above zero shows the divergence between the Alligator’s Jaw (blue line) and the Alligator’s Teeth (red line); while the histogram below the zero line shows the divergence of the Alligator’s Teeth (red line) and the Alligator’s Lip (green line).
Like the Alligator, the Gator Oscillator is ideal for trading trending markets, and the two indicators can be used together to complement each other.
The Gator Oscillator is particularly visually appealing and can help traders identify trading opportunities in trending markets quickly and easily.
It is important to note that every time period is represented by two bars on the histogram, one above, and the other below. A green bar implies that a trend is becoming stronger than the previous period, whereas a red bar indicates that the trend is becoming weaker than the previous price action.
Trading with the Gator Oscillator
The Gator Oscillator delivers trading signals using the same logic as the Alligator Indicator. The trading signals come in 4 phases as follows:
Both bars are red. This means that a trend is non-existent in the market.
In this phase, one of the red bars turns green. It does not matter whether it’s the one above or below. This is a signal that a potential trend is forming in the market.
In this phase, both bars on either side of the zero line turn green. This is a signal that a trend has formed in the market, and traders can now place trades in the direction of the new trend.
In this phase, one of the green bars turns red. Again, it does not matter which bar turns red. This is a signal that the prevailing trend is losing momentum. It is at this phase that traders should book or lock their profits.
Bill Williams discussed the Fractals indicator in his book ‘Trading Chaos’. The logic behind Fractals is that price action is inherently repetitive, and the indicator can help traders decipher the price patterns in play.
A fractal formation in the market is made up of 5 bars, in which the third bar (middle one) represents either the highest high or the lowest low.
The Fractal indicator prints arrows on these highs and lows. An arrow above a price bar is a buy fractal, whereas an arrow below a bar is a sell fractal.
A buy fractal serves as resistance, but a break above it triggers a buy signal. Similarly, a sell fractal serves as support, but a break below it triggers a sell signal. The Fractal indicator is a trend following tool that is functionally similar to the Parabolic SAR.
Trading with the Fractals Indicator
The Fractal indicator has many applications in trading. To start with, it can pinpoint the areas where traders can place their stop losses and take profit orders. It also identifies the action zones where traders should watch price action keenly.
Furthermore, the general wisdom with the Fractal indicator is to trade in the direction of the fractal start, but only when the market comes back and looks to break beyond the initial price point.
But in all fairness, it is not a comprehensive indicator, and it works best when combined with the Alligator indicator. Bill Williams outlined specific conditions that must be met when combining the two indicators.
To place a buy order, a buy fractal must appear above the alligator’s teeth (red line). Similarly, to place a sell order, a sell fractal must appear below the alligator’s teeth.
The Fractal indicator can also be combined with the Fibonacci tool that also provides solid retracement and extension targets for price action.
Market Facilitation Index
The Bill Williams Market Facilitation Index (BW MFI) indicator is designed to measure the willingness of the market to move the price. It is basically an assessment of how market prices react to new volume in the market.
By assessing price change and tick volume, the BW MFI can give a comprehensive assessment of market behaviour and prevailing sentiment. It essentially filters out potentially false price movement to ensure that traders only take trades in ideal market conditions.
The indicator is calculated by a simple formula as follows:
BW MFI = (High – Low)/Volume
High = The highest price of the current bar
Low = The lowest price of the current bar
Volume = The volume of the current bar
Trading with the Market Facilitation Index
The indicator value is presented in the form of a multicoloured histogram, where different colours inform traders of the underlying relationship between price and volume.
The colours are:
A green bar is an indication that both MFI and volume are up. The increase in MFI implies increasing-price acceleration, while an increase in volume implies capital inflow is backing the move. This is a strong signal that the prevailing trend will continue, and traders may join the party.
A blue bar is an indication that MFI is up, but volume is down. This implies that the current price movement in the market is not backed by sufficient volume, and traders should look to protect or wind down their positions.
A pink bar is an indication that MFI is down, but volume is up. This denotes a massive bull-bear tussle that will either lead to the continuation of the previous trend, or the start of a new one. Bill Williams also referred to this scenario as a ‘squat’, and it is a signal for traders to get ready to join the winning team.
A brown bar is an indication that both MFI and volume are down. This implies that the prevailing trend is fading and market participants have no real interest in driving prices further. This is not an ideal market to trade in any circumstance.
The BW MFI indicator provides important market information, but traders should combine it with indicators such as Fractals or Moving Averages that will help in confirming prevailing trends in the market.
Trade with Bill Williams Indicators at Friedberg Direct
All the above Bill Williams indicators are available on all Friedberg Direct platforms provided by AvaTrade. Here is why you should trade with us:
- Regulation. Friedberg Direct is a locally regulated Canadian broker.
- Advanced Platforms. Use Bill Williams indicators on our trading platforms, including MT4 and MT5.
- Education. Learn more on how to implement strategies using indicators in our comprehensive Education centre.
- Demo Account. Use the free demo account to test, tweak or optimise your Bill Williams strategies without risking any of your money.
Bill Williams Indicators main FAQs
- How do you set up Bill Williams’ alligator indicator?
The alligator indicator is composed of three lines, which are actually slightly modified moving average lines. The moving averages are smoothed, but they are also displaced, meaning they are shifted several bars into the future to produce better results. Those three lines are called the jaws, teeth, and lips of the alligator. The three lines are then used to determine whether the traders should be focusing on a trend trading strategy, a range-bound strategy, or a breakout strategy. When setting up the indicator the lips are set to 5 and displaced by 3, the teeth are set to 8 and displaced by 5, and the jaws are set to 13 and displaced by 8.
- How do you trade Bill Williams’ alligator indicator?
The changes in the positions of the three lines let the trader know what state the market is in. When the three lines are intertwined and close together the alligator is said to be sleeping, and the market is range-bound. When the lips turn to cross over the teeth and jaws it is said that the alligator is waking, and that means a potential trend is forming. When a candle closes above (or below) all three lines the alligator is said to be eating and the trader should be in the market with a buy if the candle closes above the lines, or a sell (short) if the candle closes below all three lines.
- How is Bill Williams’ fractal indicator used?
The fractal indicator looks for possible reversals in the market. Fractal formations occur where there are five consecutive candles and the middle candle (the third) is either the highest high or the lowest low. When this fractal pattern develops it creates entry points for trades, with the top of the highest high being a buy signal when broken and the lowest low being a sell signal when broken. It is notable that this indicator is most accurate when used on higher timeframe charts (daily or greater), however there will also be far less signals generated.
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** Disclaimer – While due research has been undertaken to compile the above content, it remains an informational and educational piece only. None of the content provided constitutes any form of investment advice.