In this article, we will discuss the Alligator indicator, created by a well-known exchange guru Bill Williams. He is known for his several books about trading, "Trading Chaos" among them, and his school "Profundity Trading Group".
Description of the Alligator indicator
Alligator is a trend indicator that gives signals of a new trend beginning in the market. According to the author, most of the time the market does not move anywhere, and trends emerge during only 15-30% of the time. He suggests making a profit during the trends detected by Alligator.
Alligator is comprised of three Smoothed Moving Averages:
- The jaws are the blue line. It is a Smoothed MA with period 13 and a shift forward for 8 candlesticks.
- The teeth are a red SMMA with period 8 and a shift forward for 5 candlesticks.
- The lips are a green SMMA with period 5 and a shift forward for 3 candlesticks.
The jaw, teeth, and lips represent three timeframes on the chart. When they are closed or intersected, this means the Alligator is falling asleep or sleeping; the market is in a flat without a visible trend. The longer the Alligator sleeps, the hungrier it becomes — the stronger will be the movement when it wakes up.
When the Alligator wakes up, it opens its mouth, and the jaw, teeth, and lips lines start diverging. The Alligator decides upon its prey, be it careless bulls or bold bears, and starts the hunt. When its stomach is full, the Alligator loses interest in the food (price) and the lines start converging — the time comes for closing the positions and locking in profit.
The Alligator indicator is featured by most popular trading platforms, including MT4 and MT5. You can install it to the chart by clicking the Main menu - Insert - Indicators - Bill Williams - Alligator. Alternatively, in the Navigate window, you can find Alligator in the Indicators folder and drag it by left-clicking to the chart.
Calculation formula, characteristics, settings
The indicator is drawn on the chart, three MAs are calculated:
- ALLIGATOR'S JAW — the slowest blue SMA:
ALLIGATORS JAW = SMMA (MEDIAN PRICE, 13, 8), MEDIAN PRICE = (HIGH + LOW) / 2
- ALLIGATOR'S TEETH — the medium red SMA:
ALLIGATORS TEETH = SMMA (MEDIAN PRICE, 8, 5), MEDIAN PRICE = (HIGH + LOW) / 2
- ALLIGATOR'S LIPS — the quickest green SMA:
ALLIGATORS LIPS = SMMA (MEDIAN PRICE, 5, 3), MEDIAN PRICE = (HIGH + LOW) / 2
MEDIAN PRICE is the average price
HIGH is the maximal price of the timeframe
LOW is the minimal price of the timeframe
SMMA (A, B, C) is a Smoothed Moving Average. A is the smoothed data, B is the period of smoothing, C is the shift. For example, SMMA (MEDIAN PRICE, 13, 8) means that the smoothed MA is taken from the average price, the period of smoothing is 13 candlesticks, the shift is 8.
Installing the indicator, you can set the following parameters:
- The period and shift of the jaws is the calculation period and the shift of the slow blue line.
- The period and the shift of the teeth — the period and the shift of the middle red line. By default, the values are 8 and 5, respectively.
- The period and the shift of the lips — the period and the shift of the quick green line. By default, the values are 5 and 3, respectively.
- The MA method defines the calculation type of the MAs. By default, they are Smoothed.
- Apply to: changes the price parameters. By default, it is the Median Price (HL/2).
Alligator is normally used with the default settings. Of course, you can always change them, evaluating the work of the indicator historically with other parameters.
Trading the indicator Alligator
Let us have a look at the main Alligator signals.
Buying at the opening of the jaws upwards
The signal to buy appears when the quick green line crosses the red one from below. After that, all the lines begin moving up, diverging — the mouth opens. A buying position can be opened, the SL behind the local minimum. Later, the indicator lines go up as follows: the green line above, the red one in the middle, the blue one below.
When the space between the lines starts diminishing, this signals an upcoming correction or the end of the uptrend. The signal to close buys will be the crossing of the red line by the quick green one from above, or the move of the price below the slow blue line. The latter can be used as a landmark for moving the SL after the price.
Selling at the opening of the jaws downwards
The signal to sell appears when the quick green line crosses the red one top-down. After that, all the three lines start moving down, diverging — the jaws open. A selling position can be opened with an SL behind the local maximum. Later, the lines keep moving as follows: the green line below, the red one in the middle, the blue one above.
When the distance between the lines starts decreasing, this means an upcoming correction or the end of the downtrend. The signal to close sells will be the crossing of the red line by the quick green line from below or the move of the price above the slow blue line. The blue line can be used for moving the SL along with the price.
Alligator has proved to be a good trend indicator. However, as the author and other traders point, there are trends on the market in 15-30% of the time only. Before a good trend starts, Alligator may give losing signals. That is why, for your trading to be more productive, it is recommended to combine Alligator with other indicators and tech analysis.
In his trading system "Profitunity" described in his book, Williams uses the indicator with Awesome Oscillator and Fractals. AO is a classical oscillator, while Fractals shows the local maximums/minimums on the chart. The three indicators united in one trading system helped Williams to yield high results.