The Zone Trade represents the fifth dimension of the Bill Williams indicators. It is designed to signal traders to add aggressively to a position whenever all the indicators (momentum, acceleration, and price) are pointing the same way.
The definition of a Zone is when both the momentum and the acceleration are moving in the same direction. In other words, not only is the momentum moving in a certain direction, but it is also accelerating.
When both the AO and the AC are increasing, CQG colors the price bars green. When both of these oscillators are decreasing, the price bars are colored red. Otherwise, the price bars are gray.
When the current bar is green, the system suggests that traders buy aggressively, but only if the close of the next bar is higher than the close of the current bar. This is called a "stop close only" buy order.
Traders should continue to add to their position with each higher close, as long as the bar remains in the green zone. In a trending market, this will increase the value of their investment quite rapidly.
Likewise, traders should place a short entry stop when the current price bar is red, and the next bar's close is lower than the current bar's close.
Using Zones to Capture Profits
Stock or commodity charts rarely exhibit more than 7 consecutive bars of the same color. This is because the market must breathe in and out. The market is generally bullish during green bars, bearish during red bars and undecided during gray bars.
This characteristic allows traders to use the zone bars as a "profit capturing" technique. For example, once we have 5 consecutive green bars (no grays or reds), traders should move profit protecting stops to one tick below the low of the 5th green bar. If the next bar's low is higher, exit stops should be raised to one tick less than that bar. Traders should continue to raise their stops until the market takes out the position on the highest low.
Do the opposite in a downward market, indicated by 5 consecutive red bars.
Using the Zone indicator takes some of the anxiety out of trading, by telling traders when to be aggressive and when to take profits.
Remember: This is a stop to take profits and get out. It is not a stop and reverse signal.
BW Zone Trade Parameters