Hello,
OK - well - let me give you some points to ponder:
There are three books by Bill Williams and each of these details different entry methods using AO:
In the latest book - you basically just go short when AO turns red and is above the zero line and stop and reverse (and go long) when AO turns green - and is below the zero line (and that is the action described in this thread).
The 'middle' book - you go short when AO turns red and is above the zero line - and you only stop and reverse when AO is showing 'double peaks' and is below the zero line i.e. it was green - then turned red - then turned green again - and that is the entry point (oh and the second peak has to be lower than the first).
In both the first and 'middle' book the crossing of the zero line in either direction is an entry point.
What I have found (with the indices anyway) is this: when the 'saucer' is sort of 'low' - in other words - the actual lines that make up the AO are very short and close to the zero line - this normally means (to me anyway) that volumes are low and there is nothing new coming into the market to move the price. From what I have seen this is when you get nailed - and I'm sure this is when the brokers are hunting stops - and it almost always happens throughout the day just until 14:30 SA time (which is 08h30 NY time) i.e. pre-market. Otherwise - it's just the dealers on the floor trading contracts among themselves. I have had the best success rate by waiting until a relatively large peak occurs and then as soon as the AO changes color you enter and then it normally goes to an equally high peak on the opposite side of the zero line - changes color - and that is where you stop and reverse. Having said all of this it should not be an issue on the longer timeframes i.e. Daily and above - just provided for some extra insight - and this is very apparent on the 15 and 30 minute charts.
Another way of being 'sure' is to wait until AC changes color - two green bars if it is above the zero line - and three green bars if it is below the zero line - and then - when AO changes to the same color you enter. I have found that this gets you into a trade VERY late though.
The way I figure it is this: you have to be prepared to take the loss - whatever it may be - at the time of the stop and reverse - and in the long run the nett effect of all of this should be profit. Every chart I look at seems to support this theory. When the market is quiet I can see where you are constantly taking a loss but when the breakout occurs (and it does seem to happen every day from around 14h30 NY time) then you just keep going with it and the nett effect of the profits and losses always seems to come out as as profit (although - yes - no question about it - if you not have to take the losses - your profit would be much more).
There is another way - that forms part of the actual Profitunity (Chaos) Trading System - and that says that you place a buy stop or a sell stop above or below the price bar that has just given you the change in color. In other words - you are not placing a market order - and the theory is that if the price continues to move in the right direction as indicated by AO then your order will get executed - if it doesn't - you wait for the next signal given. My biggest problem with this method has been my (main) broker though - the day they execute a stop order at the price that I placed it at - I'll throw a party!!!
Just a note (I did mention this before): In the Profitunity (Chaos) Trading System AO is used to add on to already open and profitable positions NOT as an entry point (although it can be if your other entry points are not taken). And - like I said - Bill Williams - in the book - does say that although he does not recommend using AO on its own - it should be worth at least seven figures to you in the long run. The reason (he goes on to say) for not using AO on its own is not because it is inaccurate but because you can get far more precise with your trading (obviously by implementing the entire system). Put it this way - so far - AO on its own - does work for me - IN THE LONG RUN - THAT'S THE KEY).
I am going to post the link to the 'second' or 'middle' version of the system below. I mean - it's not like I am the only person that know where this link is - it's on a brokers website - and - like I said - before - I have tried to find out if this is sanctioned by Bill Williams and his co-author - and they have not responded to me on this - so I don't see the harm.
Please do note, however, that this is a very 'summarized' version of the trading system detailed in the 'middle' book but it does give specific details especially when it comes to the use of AO and AC.
I can't help but wonder though - is this not complicating what was supposed to be a low maintenance trading method thread!!!
: Chaos Theory by Bill Williams: Table of Content
Edit:
By the way - don't trade the system detailed above - I only posted this link as there is a lot of information about AO and AC that I could not explain any better. The system as a whole has been revised in the latest book.
Regards,
Dale.