Trading Chaos: Maximize Profits with Proven Technical Techniques / Edition 2

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Published in 1995, the bestselling first edition of Trading Chaos provided readers with the most practical and comprehensive guide for applying chaos theory to the real world of trading and investing. But today, the markets are different than they were even a few years ago. So with fresh research in hand, coauthors Bill Williams and Justine Gregory-Williams have updated their profitable methods and provide new techniques to help you take profits from the markets.

Trading Chaos, Second Edition will not only show you how to anticipate, recognize, and react to impending bull and bear market conditions, it will also introduce you to the latest findings in physics and psychology as applied to various markets–stock, bond, futures, indexes, and many others.

The first portion of this book is devoted to understanding how the rewards you’ll acquire in trading and investing are determined by what is happening inside of you. By digging through some very interesting and deep psychological principles, you can become a profitable "trade/vestor"–using technical techniques for good short-term entries and exits, but also holding on to long-term investments when the opportunity presents itself. Trading Chaos, Second Edition will help you build a solid psychological foundation before you enter the markets.

After you’ve learned how to gain an inner analytic edge, the authors will show you how the application of self-knowledge will improve your bottom line. Through numerous charts, checklists, and examples, you’ll be introduced to proven techniques that can make the unpredictable understandable and make your journey into the markets more profitable. You’ll learn how to:

  • Sharpen entries and exits, and reduce whiplashes with the powerful "Alligator" indicator
  • Get into a new trend very early with proper use of the "First Wise Man"
  • Add on aggressively after your first entry using the "Second Wise Man" with the help of the Awesome Oscillator (AO)
  • Make fractal breakout trades with the "Third Wise Man"–these almost guarantee profitable follow-through on a trade

In this early part of the twenty-first century, you have a choice to either be a part of the last generation of traders and investors using linear (ineffective) techniques or the first generation using effective nonlinear (chaotic) techniques. By reading the Second Edition of Trading Chaos, you’ll learn how you can take your trading skills to the next level and make steady profits in any market.

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Product Details

  • ISBN-13: 9780471463085
  • Publisher: Wiley
  • Publication date: 2/20/2004
  • Series: A Marketplace Book Series, #161
  • Edition description: REV
  • Edition number: 2
  • Pages: 256
  • Sales rank: 651,953
  • Product dimensions: 6.26 (w) x 9.24 (h) x 0.90 (d)

Meet the Author

BILL WILLIAMS, PhD, CTA, is the founder of, a leader in the education of traders and investors. Besides coaching over 1,000 traders in private tutorials, his two bestselling books, Trading Chaos and New Trading Dimensions, have contributed to furthering his unique trading concepts. A trader with over forty years of experience, Mr. Williams publishes a newsletter that provides insightful market commentary for approximately 1,800 readers. He is also well known on the speaker circuit, with a loyal following of high-level traders.
JUSTINE GREGORY-WILLIAMS is a full-time trader in the stock and commodity markets and President of the Profitunity Trading Group. She has trained over 1,000 traders in the Profitunity Methodology and also does private consultations for clients. Ms. Gregory-Williams has lectured nationwide, speaking at conferences such as Futures Industry Association, TAG, Omega World, and the Traders’ Library Trading Forum.

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Read an Excerpt

Trading Chaos

Maximize Profits with Proven Technical Techniques
By Justine Gregory-Williams Bill M. Williams

John Wiley & Sons

ISBN: 0-471-46308-6

Chapter One

The Market Is What You Think It Is

There Is No Reality, There Is Only Perception

Words are things, and a small drop of ink Falling like dew upon a thought, produces That which makes thousands, perhaps millions, think. -Lord Byron


To understand how the markets really work and why the majority of market participants consistently lose money.

A number of years ago I attended a meeting in Boulder, Colorado, with a newly arrived swami from India. Muktananda proved to be a most interesting fellow. He gave no lectures; he only told stories and wove those stories into an instructional format. Accompanying him was an interpreter, complete with saffron-colored robes, from the University of Colorado. Muktananda maintained that not being fluent in English was a great advantage to becoming a guru in America. He started his lecture with the following story.

There was a student in India who wanted to become enlightened. He left his family in search of an appropriate guru to guide him further on his journey. Stopping at one guru's place of business, he inquired as to this guru's method of becoming enlightened. The guru said, "Becoming enlightened is really quite simple. All you need to do is to go home each night and sit in front of a mirror for 30minutes asking yourself the same question over and over. That question is: Who am I? Who am I? Who am I?"

The prospective student replied, "Hey, it can't be that simple."

"Oh yes, it is just that simple," replied the guru, "but there are several other gurus on this street."

"Thank you very much," said the student, "I think I will inquire down the way."

[Today we call this action seeking a second opinion.]

So the student approached the next guru with the same question. "How do I become enlightened?"

The second guru replied, "Oh, it is quite difficult and takes much time. Actually, one must join with like-minded others in an ashram and do Sava. Sava means 'selfless service,' so you work without pay."

The student was excited; this guru's philosophy was more consistent with his own preconceived view of enlightenment. He always had heard it was difficult. The guru told the student that the only job open at the ashram was cleaning out the cow stalls. If the student were really serious about becoming enlightened, the guru would allow him to shovel all the dung and be responsible for keeping the cow stalls clean. The student accepted the job, feeling confident that he must be on the right path.

After five long years of shoveling cow dung and keeping the stalls clean, the student was becoming discouraged and impatient about enlightenment. He approached the guru and said, "Honored teacher, I have faithfully served you for five years cleaning up the dirtiest part of your ashram. I have never missed a day and have never complained once. Do you think it might be time for me to become enlightened?"

The guru answered, "Why yes, I believe you are now ready. Here is what you do. You go home each night and look at yourself in the mirror for 30 minutes, asking yourself the same question over and over again. That question is: Who am I? Who am I? Who am I?"

The very surprised student said, "Pardon me, honored one, but that is what the other guru down the street told me five years ago."

"Well, he was right," responded the guru.

"Then why have I shoveled cow dung for five years?" asked the student.

"Because you are stupid, that's why," replied the guru.

I think of that story quite often while working with traders. One of the first problems I encounter is convincing traders that making profits in trading is really quite simple-notice, I did not say easy. There is a world of difference between a concept's being simple and being easy to carry out.

Looking at yourself in the mirror for 30 minutes each night is a simple concept, but asking yourself the same question over and over again and seeking an honest answer is not easy. As a psychologist I have found that we humans have two innate tendencies: (1) We tend to overcomplicate everything we touch and, because of that, (2) we cannot see the obvious.

To most traders and investors, the market is a dangerous and undependable animal. Their mottoes are: "Don't count on it" and "Get it before it gets you." They see the market as a dog-eat-dog world where other traders/investors are the dogs. This is not an accurate picture of the markets.


The markets are not mysterious and unfathomable. The primary purpose of any market is to ration, at a reasonable price, existing and future supply to those who want it the most. You trade almost every minute of your life. Profiting in the markets is much easier when you really understand the underlying structure. To keep it as simple as possible, take the Flintstones as an example. You remember Fred Flintstone, a rather rough and outdoors kind of guy, and his more domestic next-door neighbor, Barney? Fred sees himself as a macho he-man who likes to hunt dinosaurs. One day he goes out and kills a big something-a-saurus even though his freezer is already full of dinosaur burgers. Barney does not enjoy hunting and killing but he likes eating dinosaur Whoppers(r). Barney prefers to sit around his backyard whittling wood and making clubs. Fred rarely takes time to make his own clubs.

Fred wanders over to Barney's backyard and gets an idea. Why not swap Barney a couple of platters of dinosaur burgers for that new club he is finishing. So he puts this proposition to Barney: "Barney, I'll give you two platters of dinosaur Whoppers for that new club. How 'bout it?" Barney says, "Okay, you got a deal."

Fred and Barney have just created a market. It is just that simple! Both Fred and Barney valued what they wanted more than what they had. To Barney the burgers were more important (valuable) than the club he was making, and to Fred the club was more valuable than the burgers.

All Markets are Created When Two or More People Have an Equal Disagreement on Value and an Agreement on Price

When you bought your last car, the car was worth more to you than the money used to pay for it. However, to the person who sold you the car, your money was more valuable than the car. You created a miniature market when you made your deal. We buy bonds when we would rather own the bonds than the money we are paying for the bonds. Our fantasy (trading is a fantasy game; more about this later in the introduction) is that the value of the bonds will go up relative to the dollar. We bought them from some unknown trader who was just as confident that their value was going to go down. We have a real disagreement on current and future value, but we agree on price.

Every market in the world is designed to ration or distribute a limited amount of something (whether it be stocks, agricultural products, currencies, dinosaur clubs, or whatever) to those who want it most. The market does this by finding and defining the exact price where, at that moment, there is an absolute balance between the power of those who want to buy and those who want to sell.

The stock, commodity, bond, currency, and option markets all find that place of balance very quickly whether they are using open outcry or computer balancing. The markets find this place before you and I can detect any imbalance and before even the traders on the floor become aware of any imbalance. If the preceding scenario is true-and it is-then we can come to some very simple and very important conclusions about information that is distributed through the market and accepted without question.


You can break the cycle of failure by recognizing the things that cause failure. This book not only shows you why most traders lose money; it also introduces you to the latest findings in physics and psychology as they apply to the various markets and to your thinking patterns.

You probably dream about what every other investor/traders desires, which is success in the markets. However, when you trade, you come away with fewer goodies than you had counted on.

Profitunity is here to change all of that. Perhaps the Profitunity approach is the cure that you had dreamed of and prayed for, and wondered why someone has not figured it out. The approach taught here is all you will need to stop forever the endless cycle of trading and losing. This approach can completely change your trading future in a way that may seem extreme. It will do it by eliminating errors in thinking from your game plan and replacing these errors with something that works. Here are some basic fundamental truths that you must understand to become a consistent winner. We call them the five sacred Cows Terminators.

Trading becomes perplexing when you think about all the different stocks and commodities, the electronic retrieval systems, the fast execution of your orders, and the second-by-second monitoring of the markets and still, fewer than 10 traders out of 100 are consistently successful over time. That is simply unacceptable. This 90+ percent failure rate represents the concrete boots that keep you anchored at the bottom of the ocean of money promised by trading gurus. You, most likely, are drowning in a sea of broker or advisor promises.

Now let us clear our minds and expel the old ideas about life and trading as you begin to use your Five Sacred-Cow Terminators. These may appear to be strange at first but will make more sense as you progress. Remember trading does not work for most of those who trade. There must be something better and there is! So we get rid of five common ideas that are promoted as truth but simply do not work and will drag you under in your search for profits. Our first job is to eliminate these Five Sacred Cows from our minds and our trading.

Sacred-Cow Terminator #1: Don't Listen to the Popular Experts

Remember that financial writers know as little as and perhaps even less than you do about the markets. They are paid by the word and not by truth. As stated earlier, if they really understood the markets, they could make many times more money trading than they do writing about trading.

Ask yourself a question: Why do none of these analysts and commentators ever show their personal trading track records? Could it be because they are not personally able to make profits in the markets? If they were good at trading, they probably would be eager to tell you how much profit they are making.

Crazy, huh? If years of platitudes from dead traders who buried their secrets with them, other catch phrases, and hype have led 90+ percent of you to fail, then what you have listened to has aided in your failure. You must decide to do something different or continue to make it worse.

Sacred-Cow Terminator #2: There Is No Such Thing as Bullish/Bearish Consensus

Oh, yes, they tout that on TV and in every financial newspaper and even your broker may share this misinformation with you. However, let us examine if there could be such a thing as bullish and bearish consensus. If the markets are doing their job (and they do it well), their primary job is to make sure there is no bearish or bullishness in the markets. Those who tout the bull-bear information get it by surveying a group of traders and asking their opinions about the market. They survey those who are not in the market at the moment because those who are in have voted their preference and their vote is already in the markets. If, for example, they report a 75 percent bullish consensus in bonds, all that means is they have not surveyed all the bears. The markets cannot endure even 50.01 percent bullishness before the price rises. Remember that the market's primary job is to instantly find that exact place where there is an equal disagreement on value and an agreement on price.

Sacred-Cow Terminator #3: There Is No Such Thing as Oversold/Overbought

If there is no such thing as bullish or bearish consensus, then it logically follows that there cannot be any such thing as an oversold or overbought condition, even though analysts talk about it all day on CNBC-FNN and have an oscillator that supposedly measures it. How can it be measured when the markets are specifically designed to destroy any oversold or overbought situations in microseconds, well before the traders see it on their screens and days before they start talking about it?

Sacred-Cow Terminator #4: Most Money Management Suggestions Are Ineffective

You do not read much about money management without running into someone's ineffective ideas such as "Whenever you buy a bond, immediately put in a $500 stop." Sometimes they say things like "Always use a 25 percent trailing stop" to maximize your profits. Think about this concept for a moment. When you follow that advice, you are trading only your bank account or your wallet, neither of which has one iota to do with the actual market movements. Most of us have had the experience of using a wallet stop, only to see the market turn around and leave us with a much smaller equity than we would have had if we had traded market movement. That kind of protective thinking comes directly from fear, and in the markets, fear never wins in the overall picture. Our only hope for consistent profits is to get in synch with the market and attune our own personal strategy and energy to that of the market.

Sacred-Cow Terminator #5: Common Formulas for Profitable Trading Do Not Work

Let us examine another common misconception among traders. Two often-repeated formulas for successful trading are (1) buy low and sell high and (2) to make profits you must trade with the trend. Those two statements are absolutely incompatible. If you buy low or sell high, you are standing in the way of the trend, not following it. And if you follow the trend, you are not buying low or selling high. The Profitunity strategy is to know when to use either one of the two approaches. There are times when it is best to trade against the trend and other times when you want to go with the trend. The choice of which strategy to use is determined by the market itself. Mother Market always tells us exactly what we should do. And when we do not, the market will tell us where we went wrong and what we have to do to correct the error and get back into the profit-making mode.


Excerpted from Trading Chaos by Justine Gregory-Williams Bill M. Williams Excerpted by permission.
All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
Excerpts are provided by Dial-A-Book Inc. solely for the personal use of visitors to this web site.

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Table of Contents




CHAPTER 1: The Market Is What You Think It Is.

CHAPTER 2: Chaos Theory.

CHAPTER 3: Defining Your Underlying Structure—and How That Affects Winning and Losing.

CHAPTER 4: Gearing Up for Trading.

CHAPTER 5: What Type of Trader Are You?

CHAPTER 6: Super-Natural Trade/Vesting.

CHAPTER 7: Navigating the Markets.

CHAPTER 8: The Mighty Alligator.

CHAPTER 9: The First Wise Man.

CHAPTER 10: The Second Wise Man.

CHAPTER 11: The Third Wise Man.

CHAPTER 12: What Happens When the Wise Men Get Together?

CHAPTER 13: How to Get Out of a Hole Once You Are In.


APPENDIX 1: Checklists for Trade/Vesting in the Markets.

APPENDIX 2: Frequently Asked Questions.

APPENDIX 3: How to Control Your Mind While Trading.

APPENDIX 4: Setting Up Investor’s Dream for Profitunity Signals.

APPENDIX 5: Setting Up CQG.

APPENDIX 6: Setting Up MetaStock Professional 8.0.

APPENDIX 7: Setting Up TradeStation 2000i.



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