When conducting a technical analysis, you will come across various indicators. Alligator is one of the most popular lagging indicators that makes information easily digestible for traders.
The Alligator was developed by the legendary trader Bill Williams. The indicator consists of three moving average lines that represent the jaw, lips and the teeth of the alligator. The alligator alternates between periods of eating and sleeping. The idea behind using this indicator is that prices go from active to passive phases. Forex trading alligator indicator makes spotting beginnings of trends and active trading phases easier.
Alligator indicator overview
- The alligator indicator in fx consists of three lines that are the lips, teeth and the jaw of the alligator
- The three lines are 5, 8 and 13-period moving averages
- When the three lines are flat, the alligator is considered to be asleep
- The Alligator indicator is often used alongside other indicators, such as the MACD and RSI
- The convergence-divergence generated by the alligator serve as trade signals
- The Alligator indicator is readily available on most trading platforms, and it’s free to use
Technical details of Alligator indicator
Before looking at the practical application of the alligator strategy, it is important to clearly define the characteristics of the underlying indicator developed by Bill Williams, as well as some of the other indicators that are commonly used alongside it.
The Alligator indicator
The alligator indicator in Forex trading uses a smoothed average with a simple moving average. The three moving averages are set at five, eight and thirteen periods. These MAs are the jaws, teeth and the lips of the alligator.
The indicator typically has four distinct phases of activity:
- When the three moving averages are intertwined, the alligator is said to be asleep
- If the alligator is asleep for an extended period, the likelihood of a breakout and “awakening” increases
- When a trend has formed, the alligator awakens and starts eating
- Once the trend ends, the alligator closes its mouth and goes back to sleep
It is worth noting that the moving averages used by the Alligator indicator are Fibonacci numbers. Each moving average is smoothed by the number of periods that precede it on the Fibonacci sequence – the five-period MA is smoothed by three bars, etc.
To calculate the Alligator, we must find each of the three smoothed moving averages:
SUM1 = SUM (CLOSE, N)
SMMA1 = SUM1/N
Subsequent values are:
PREVSUM = SMMA(i-1) *N
SMMA(i) = (PREVSUM-SMMA(i-1)+CLOSE(i))/N
SUM1 – the sum of closing prices for N periods;
PREVSUM – smoothed sum of the previous bar;
SMMA1 – smoothed moving average of the first bar;
SMMA(i) – smoothed moving average of the current bar (except for the first one);
CLOSE(i) – current closing price;
N – the smoothing period.
In most cases, the calculation is not necessary, as the indicator is readily available on most FX trading platforms.
The three moving averages are:
- Jaw: Starts with the 13-period SMMA and is smoothed by eight bars on subsequent values.
- Teeth: Starts with the 8-period SMMA and is smoothed by five bars on subsequent values.
- Lips: Starts with the 5-period SMMA and is smoothed by three bars on subsequent values.
Factors to consider
We can also look at some important factors to consider when implementing the Williams Alligator strategy:
- The jaws are the slowest-moving parts of the indicator, while the lips are the fastest
- When the lips are crossing downward, the alligator is asleep and awakens when the lips cross upward
- When the three lines are stretched apart, the alligator is eating
- When the trend is coming to an end, the indicators will converge into narrow bands, which indicates that the alligator is done eating
- The indicator may generate false signals when the market is going through an unstable patch and the three lines are frequently crossing each other. This may cause many awakening signals to fail
The Alligator is a versatile strategy that works well with several other technical indicators:
- CCI – The commodity channel index is often used alongside the Alligator indicator. A common strategy is to enter the trade when the alligator is asleep and the CCI is sending an overbought signal
- MACD – When the Alligator lines are clearly separated and the MACD becomes positive, traders can enter long positions and place a take-profit when the MACD shows a negative value and the green Alligator line closes in the red
Pros and cons of the Alligator forex strategy
Much like any other trading strategy, the Williams Alligator comes with its fair share of advantages and disadvantages. It is important for traders to consider these factors before adding the strategy into their forex trading mix.
- The Alligator provides a systematic method of entering and exiting the market
- The strategy identifies the broader trend by using the jaw movements of the Alligator
- The strategy is quite simple to understand for traders of any skill level
- The strategy heavily relies on of the fundamentals of support and resistance
- During tough market conditions, the three MAs may cross each other frequently, which can create false signals for traders
- When used with other indicators, the Alligator lines may be visually tedious on the chart
Practical applications of the Alligator indicator
To get a better understanding of how the Alligator works in Forex trading, let’s look at the alligator indicator example.
The movements of the Alligator moving averages are most evident on daily charts. The chart shows periods when the jaws are open and cut through the price chart. The latter period of the chart shows all three moving averages falling below the price line. The idea is to enter trades when jaws are opening to catch the forming trend. Alligator makes recognizing trends easier and gives us the opportunity to join them. Keep in mind that the indicator is not for trading choppy, ranging markets.
FAQs on the Alligator forex strategy
How accurate is the Alligator in forex?
The Alligator strategy follows the idea that the market spends most of its time in tight ranging periods. The Alligator seeks to show the trend movements and the best possible period with a high likelihood of a breakout.
How do you read William Alligator?
The Williams Alligator indicator sends out buy and sell signals by applying convergence-divergence relationships to the three moving averages. The indicator alternates between signals of awakening and sleeping, which informs traders about trend breakouts.
What does Alligator mean in trading?
In trading, the Alligator is a technical indicator that consists of three moving averages, with periods of 5, 8 and 13. The 5-period MA is the lips, the 8-period MA is the teeth and the 13-period MA is the jaw.