Bill Williams’ Alligator indicator provides a useful visual tool for trend recognition and trade entry timing, but it has limited usefulness during choppy and trendless periods. Market players can confirm buy or sell signals with a moving average convergence divergence or another trend identification indicator. The Alligator indicator uses three smoothed moving averages, set at five, eight, and 13 periods, which are all Fibonacci numbers.
Remember, forex is a volatile market and a currency pair can experience a price movement of several pips in a very short period of time. Always perform thorough technical and fundamental analysis before opening a position. Steps “2” and “3” represent prudent risk and money management principles that should be employed. Also take note that the Alligator is a lagging indicator that works best after a long period of sleep.
The CCI will send the first alert, followed by the Alligator crossover and a closing candle above or below the three moving averages . To add the Alligator strategy to the MT4 chart, you need to select the “Insert” menu, click on the “Indicators” tab. Select “Bill Williams” in the “Indicators” menu and select the name “Alligator” from the list. After that, set the required technical indicator parameters or leave the default ones and click “OK.” The indicator will be added to the chart of the trading instrument. When the green balance line is above the red one and the red is above the blue, and the price is trading above all the Alligator lines, a buy signal is generated. I should note that the three balance lines are the moving averages that are applied to the median value ((high+low)/2), not to the bars’ opening or closing prices.
Using the Alligator, you will be able to pick up strong market moves and take profits at the end of the trend. The Alligator strategy is a simple technical analysis tool and an efficient indicator, suitable for a beginner trader. It indicates the market state, defines the support and resistance levels to enter a trade.
To enter a buy trade, the price must be above all indicator lines. Expect when the hourly candlestick breaks through the most recent downward fractal and closes below. You wait for the moment when the hourly candlestick breaks through the last formed upward fractal and closes above the high. This will signal that there should be an entry point to open a position following an uptrend.
How do you trade an Alligator Indicator?
The Alligator’s Lips, the “Green” line, is a 5-period Smoothed Moving Average, moved by 3 bars into the future. The Alligator’s Teeth, the “Red” line, is an 8-period Smoothed Moving Average, moved by 5 bars into the future. The Alligator’s Jaw, the “Blue” line in the diagram below, is a 13-period Smoothed Moving Average, moved into the future by 8 bars. This exposes a significant drawback of the indicator because many awakening signals within large rangeswill fail, triggering whipsaws.
The Alligator begins to wake up when the distance between the lines begins to increase. On the right side of the chart, we see that the price is trading below the lines, and they acquire a downward direction. It is a sell signal in the Alligator trading strategy. The jaw is the 13-period smoothed moving average that is shifted into the future by 8 bars. The lips line is the smoothed moving average with the default period of 5, moved by 4 bars into the future. Over many years, Bill Williams studied the US stock market and watched for regularities.
It is better to avoid the high risk, and when a new signal appears in the same direction, then you can start trading. The Fractals indicator perfectly complements the Alligator. The combined application of the two Williams’s indicators provides accurate entry points, with the Fractals tool serving as an additional filter.
How it is Calculated — Williams Alligator Formula
The initial smoothed average is calculated with a simple moving average, adding additional smoothed averages that slow down indicator turns. The Alligator indicator helps differentiate between trending and resting periods. The indicator consists of three lines, overlaid on a price chart, that represent the jaw, the teeth and the lips of the alligator. It indicates that a trend is in effect and in what direction the trend is moving.
Alligator’s Lips – 5-period smoothed moving average which is moved 3 bars into the future. Alligator’s Teeth – 8-period smoothed moving average which is moved 5 bars into the future. Alligator’s Jaw – 13-period smoothed moving average which is moved 8 bars into the future. It depends on the timeframe where you use the Alligator in a trading platform. If you trade in long timeframes (H4 – D1), the signal period will last from one week to one month.
Another reason to exit a trade manually if the price passes the average daily move . Here everything becomes individual, and you should act, according to your trading system. You spot the moments when the price momentum begins and try to enter at the momentum inception. When the market is trading flat, neither the Alligator alone nor the combination with Fractals will not work.
First, you need to look at a chart that is either trending upwards or moving downwards. It is wrong to use it when the price of an asset is consolidating. The smoothed moving average is a type of MA that uses a longer period to compute. When it is calculated, it does not refer to a fixed period but takes all available data into account. You calculate this by subtracting the previous SMA from today’s price. So now, the alligator has lost interest in the food and it closes its mouth to rest .
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Commodity Channel Index (CCI) Indicator
To increase the performance of trading signals, you should use additional filters such as Fractals. The trade is moved to the breakeven, according to this strategy, when the Jaw line is below the entry price for a sell trade and above the entry price for a buy trade. The strength of this trend will be proportional to the time the Alligator slept. The longer the market has been in the accumulation zone, the stronger the momentum will be. In a trading range, the Alligator’s «mouth» is closed.
The trend may start
On the rise, the price drops to the Jawline, but the indicators do not cross each other. An alligator «sated» sell signal arrives when the Lips cross below the Teeth and Jawlines and lines intertwine as the price moves sideways. Williams believed that individuals and institutions tend to collect most of their profits during strongly trending periods.
Likewise, the teeth line should be above the jaw line correspondingly. It is also recommended to confirm the entry point using oscillators or other indicators like moving average convergence divergence. A significant flaw is that you need to adjust the Alligator technical indicator parameters for each timeframe individually. However, with this approach, there will be a lot of signals in short timeframes, half of which will be false.