Trading Strategies That Changed the World: Trading Chaos-2 by Bill Williams (part 3)

Trading Strategies That Were a Revolution: Trading Chaos-2 by Bill Williams (part 3)

Reading time: 8 min

Hello, our dear blog readers! I hope you’ve read the first and the second part about Bill Williams and his Trading Chaos and are about to read the first book from A to Z. If necessary, read the book for the second and third timesб it surely will prove useful. Most likely, you may even like to read again and find out some new nuances and aspects and relate them to each other.

Right now, I’ll start talking about the second edition of Trading Chaos by Bill Williams. In this book, the bestselling author introduced a new term, TradeVesting, a combination of trading and investing. The first part is devoted to a trader’s psychology, their interaction with the market, the right way of thinking; it adds some new recommendations and revises the old ones. It also describes a consistent trading system based on the Trading Chaos Theory, which may be rightfully considered as one of the best.

“Chaos is where great dreams begin. Before a great vision can become a reality there may be difficult.”

“Before a person begins a great endeavor, they may encounter chaos.”
“As a new plant breaks the ground with great difficulty, foreshadowing the huge tree, so must we sometime push against difficulty in bringing forth our dreams.”

Hexagram 3, “I Ching” ("Book of Changes")

From the very first lines, Williams reminds readers and thereby emphasizing his thought, that our thinking and interpretation of the market are backbones of our own trading. Once again, he says that markets are not complicated, mysterious, or incomprehensible. And money is also real, just like our thoughts about them. The value of money, as well as trading success, lies in ourselves. In other words, the author continues reminding us of the necessity to improve and perfect ourselves in all aspects of life.

Williams calls fundamental truths that will help traders snap a losing streak and become a successful trader “Five Sacred-Cow Terminators”:

  1. Don’t listen to the popular experts.
  2. There is no such thing as a bullish/bearish consensus.
  3. There is no such thing as oversold/overbought.
  4. Most money management suggestions are ineffective.
  5. Common formulas for profitable trading do not work

All these terminators will make some people be disappointed, while others – awake from artificial dream, think for themselves, and make their own decisions. By so doing, Williams tells us “Remember, there is no reality, there is only perception.” This thesis became a foundation of the entire Chaos Theory, after all, most people on the market continue to trade their opinion, although they should trade goods.

Chaos Theory – a new paradigm for trading

I_t’s well known that the heart has to beat largely regular or you die. But the brain has to be largely irregular; if not, you have epilepsy. This shows that irregularity, chaos, leads to complex systems. It’s not all disorder. On the contrary, I would say chaos is what makes life and intelligence possible. The brain has been selected to become so unstable that the smallest effect can lead to the formation of order._

Ilya Prigogine

A paradigm, through which we look at the market, defines what we do and, consequently, achieve. Chaos Theory offers a new paradigm for seeing markets and ourselves.

Chaos doesn’t imply a random nature, it’s just a higher and different degree of order. Because both nature and the human brain are chaotic, the markets, as a part of nature and a reflection of human nature, are chaotic as well.

Nature and the world appeared from nonlinear sources. Things created by people are a product of the left hemisphere, that’s why they are linear. Creating trading systems in the same way, a trader can’t successfully describe the market and make a profit from it.

Fractal geometry and markets

Fractal geometry and markets

Fractal geometry is one of the tools of the science dealing with chaos. This means that the market is generated by turbulent collective activity and is a nonlinear phenomenon of a fractal structure. Any trader with a bit of experience has learned that the markets are not a simple, mechanical result of supply and demand.

Fractals can be seen on charts due to accretion and iteration. The simplest model of iteration is the summation sequence known as Fibonacci numbers. The sequence starts with 0 and 1. Then, by adding together the two immediately preceding numbers, the sequence becomes the following:

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 134, and continues to infinity.

The curious property of this iteration process is that each number in the sequence is exactly .618 of the next number.

What we see in the market depends just as much on our current paradigm. If we are coming from a linear perspective, we will never see the real market and will be at a disadvantage when it comes to trading and making profits. The more irregular and choppier a market is, the larger will be its Fractal number

Trader’s underlying structure and how it affects their success


Bill Williams believed that fundamentals and technical analysis do not accurately reflect the market’s behavior. If the markets were linear, there would be fewer losers, particularly in view of the high intelligence of the average trader. The science of chaos provides three primary principles for study of the markets:

  1. Energy always follows the path of least resistance.
  2. The path of least resistance is determined by the always underlying and usually unseen structure.
  3. The always underlying and usually unseen structure can be discovered and can be altered.

What is a structure?

Any structure consists of four elements:

  1. components.
  2. plan.
  3. power source.
  4. purpose.

All structures have a tendency to change from one state to another. In each case, the underlying structure determines the tendency toward movement. Structure determines behavior. Structure determines the way anything behaves—a bullet, a hurricane, a cab driver, a spouse, a market. The structures that have the most influence on your trading results are composed of desires, beliefs, assumptions, aspirations, and, most of all, your understanding of the underlying structure of the market and yourself.

Type one structure

A Type One structure produces an action-reaction, back-and-forth, figure eight type of behavior: one type of desired behavior leads into an opposite undesired behavior. A simple example is the pendulum.

If your underlying structure is one of oscillation, no solution will help because psychological solutions do not address the underlying structure that causes behavior.

Type two structure

Type Two structure is located in the creative part of the brain. If Type One structure attempts to solve problems (quit losing), then Type Two structure is geared for action that brings something new into being. Rather than solving problems, it creates results.

Problem-solving does not enable you to create what you want (profits); often, it perpetuates exactly what you do not want (losses). You do not need to transform your trading, you need to transcend it.

Grail and gearing up for trading


Successful trading has nothing to do with buying a new powerful computer with ten monitors, new indicators, digests, or books. They won’t make you a better trader. You should change. Trading is an inside job.

When you trade the markets, there is nothing to hide behind. At the end of the day, you either have more money, the same, or less. If you lose, there is simply no one to blame. The converse of this statement is that if you win, you do not have to say “thank you” to anyone. What you really need to see through is your choice of belief systems.

You can choose. As a matter of fact, the most important choice in the whole world is “either to choose to choose or not to choose.” If you choose to follow a mechanical system, you have not really chosen to trade the market. Your true nature is all you need. The Holy Grail of trading is knowing what the market wants. It will give you an edge and put you on the same side as the market.

What happens when you do not want what the market wants?

  • You are often nervous and anxious because the market may not cooperate with your plans.
  • You are usually scheming in some way to outsmart the market.
  • You are either in a battle or recovering from one (usually a loss).
  • You are easily angered when interrupted or distracted by something.
  • You are driven to trade more, risk more, to go temporarily catatonic.
  • You are jealous of other traders who are making profits.
  • You feel that what you have is what you are and not making profits means you are nothing.

How is life when you want what the market wants?

  • You are never disappointed with what happens.
  • You are in the right place at the right time.
  • You are quietly confident no matter what the circumstances.
  • You are out of reach of anger and anxiety.
  • You are awake and sensitive to the market movements.
  • You are free of that feeling that you may have missed out.
  • You are in command of events.
  • You are mentally quiet.
  • You are eternally grateful.

In trading, you must be in the right place at the right time and the same thing is true with your mind. You must be coming from the right place at the right time. Mind location is much more important than trade location. Remember that trading should be fun, as if you grow lighter in spirit. That lightness, then, lets you see the obvious about the market.

What category do you think you fall into?

In the markets, we have individuals who feel more comfortable in the role of Columbus (the traders), while others feel more comfortable in the role of the crewmember (the investors). There are also the individuals who feel more comfortable assuming the role of the landlubbers (the savers).

If you are an independent thinker and enjoy making decisions, even if you are acting against the majority opinion, you are most likely a person who feels comfortable in the Columbus role. Those who fall into the crew member category are at a slight disadvantage because their success or failure depends on the success or failure of their leader. It is not uncommon to hear complaints from crew members about people, circumstances, or things that happen to them as if they have no control over those circumstances/

Landlubbers feel more secure because they do not worry about taking risks. They tend to be content or willing to put up with their level of discontent. Landlubbers tend to be procrastinators. Their thinking is that it is safer to put off making a decision than being held responsible for making one.

Super-Natural Trade/Vesting

The market is a creature of chaos— a far from equilibrium soup simmering on the uneven flame of trader psychology. Therefore, to consistently win we must: go with the flow, ride the tide, and bend with the trend.

The market is a three-dimensional happening: Time + Price + Your Psychology.

The most common trading behavior today is found in the person who can win, win, and win and then lose it all on some stupid decision. We think when we lose that we need other techniques, more information, a new indicator, or an entirely new approach. What we really need is a new mind.

To look at our life and the results we get, we must also look at reality. Keeping this generic, we define reality as what is. In fact, every time you place an order you do so because you have a fantasy that the market is going to move one way or the other.

Conclusion for beginners

No one is 100% sure where the market will go. No one can control the markets. We, as traders, are at the mercy of the market movements, but we can control our mental reactions to whatever happens if we just learn to understand how our thought process works.

When the market is confusing or bringing up pictures of disaster, we have three choices. We can go crazy, catatonic, or conscious. In other words, we can relate to our mind rather than react to our thoughts. It is really important to realize that our wild and crazy mind, filled with the same type of untamed, tangled thoughts that run through it. First of all, you should work on yourself, but not the market.

Open Trading Account

[wpforms id="5765" title="false" description="false"]


Previous article

How does Pump and Dump Strategy Work? Discussing the Examples

Pump and Dump trading system is very simple in use and can be easily handled by any trader who knows how to work with support and resistance level. Potential profit is not limited, because traders can work with stocks of both cheap and expensive companies.

Next article

Gazprom – Should One Expect a New Growth After the Start of a Descending Correction?

Last summer, Gazprom stocks showed an excellent upwards dynamic and finally broke the sideways channel where they had been moving for several years. From the technical point of view, nothing extraordinary happened: as soon as the price is leaving a sideways channel, volatility is increasing and they may easily cover the distance equal to the width of this channel in the direction of a breakout. This is exactly what we’ve seen in the Gazprom chart