Mastering Alligator Trading Strategy

Mastering Alligator Trading Strategy

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In this overview, we will discuss a trading strategy called Alligator. This is a slightly simplified variant of a well-known strategy by Bill Williams "Profitunity".

Description of the Alligator

The strategy has the same name as its main indicator - Alligator. The idea of the strategy is finding signals to buy/sell based on the combination of the signals of three indicators by Bill Williams: Alligator, Awesome Oscillator, and Fractals.

The Alligator indicator is the main indicator of the strategy, it defines the trend. When the three main lines of the indicator (Moving Averages) are going horizontally, intertwined, the market features no clear trend. Conversely, when the lines diverge and go in one direction (up or downwards), this forecasts a possible beginning of a new trend.

The Awesome Oscillator is based on the difference between two Simple MAs. It helps to define the current trend and find the places of possible reversals on the chart. The indicator looks like a bar histogram under the price chart. If the market is growing, the bars also grow and turn green, and when the market is falling, the bars follow suit and turn red.

The Fractals indicator shows the local highs and lows reached by the market on the chart. The extremes are highlighted by special directed marks. Fractals demonstrate the borders of local price ranges in many strategies, including the Alligator.

Basic principles of the Alligator trading strategy

To start trading by the Alligator, the market must be sleeping, i.e. the Jaws, Teeth, and Lips of the Alligator indicator must be intertwined, going horizontally. The Awesome Oscillator must be near 0. The entry signal will appear when the Alligator lines and the Oscillator will start moving in one direction; it will be confirmed by a breakaway of the nearest fractal on the chart.

To start looking for trading signals, install all the three indicators of the strategy on the price chart of your financial instrument. You may either use the default settings or play with them and find those that suit your trading style. In MetaTrader 4 and MetaTrader 5, install the indicators via the Main Menu: Insert - Indicators - Bill Williams - Alligator, Awesome Oscillator, Fractals.

Install the indicators Alligator, Awesome Oscillator, Fractals
Install the indicators Alligator, Awesome Oscillator, Fractals

A signal to buy by the Alligator strategy

A signal to buy appears when a sleeping period changes for an upward movement. To enter the market, make sure that the following conditions are complied with::

  • the intertwined lines of the Alligator start going upwards and diverge - the alligator opens its jaw upwards, hunting the bears;
  • the histogram of the Awesome Oscillator starts growing from 0, its color is green.

As the entry point, take the level of the nearest fractal, lying above the Alligator lines. The price escapes the local range upwards. Initially, place the Stop Loss behind the level of the nearest opposite fractal, lying below the Alligator lines.

A signal to buy by the Alligator strategy
A signal to buy by the Alligator strategy

Later on, when the price is growing confidently, bring the SL to the breakeven. The main landmark for taking the profit is the red line of the Alligator. When the candlestick closes under the red line, close your profitable position. At a sharp ascending impulse, you may take the profit before you lose on a correction - close the position as soon as a red bar on the Oscillator histogram appears.

A signal to buy by the Alligator strategy - Take Profit
A signal to buy by the Alligator strategy - Take Profit

A signal to sell by the Alligator strategy

A signal to sell appears when a sleeping period changes for a downward movement. To enter the market, make sure that the following conditions are complied with:

  • the intertwined lines of the Alligator start going downwards and diverge - the alligator opens its jaw to devour careless bulls;
  • the histogram of the Awesome Oscillator starts declining from 0, its color is red;
  • the price breaks away the nearest local fractal lying below all the three Alligator lines;
  • the SL is behind the opposite fractal above the Alligator lines.
A signal to sell by the Alligator
A signal to sell by the Alligator

After opening a position, follow the trade this way:

  • Transfer the SL to the breakeven after the red MA of the Alligator reaches the opening price;
  • If the movement is calm, take the profit after the price reverses upwards, and the candlestick closes above the red MA of the Alligator;
  • If the impulse falling is sharp, you may take the profit earlier, when the Awesome Oscillator shows a local reversal upwards, showing a green bar.
A signal to sell by the Alligator - Take Profit
A signal to sell by the Alligator - Take Profit

Bottom line

The Alligator trading strategy is a simplified version of a complex and many-sided strategy "Profitunity" by Bill Williams. To make the signals more reliable, try to combine the strategy with the classical tech analysis: support and resistance levels, price patterns. For a better understanding of Williams's method, I recommend the full version of the strategy by the book "Trading Chaos".




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