Experienced traders know the importance of reliable technical indicators. They guide our trading decisions and help us avoid losses. One of the popular tools that we will discuss in this article is the Williams alligator indicator. It was created on the assumption that most of the time, the market does not move anywhere. This is why a clear understanding of when a new trend emerges is crucial. Under such circumstances, the alligator can be very useful. In this guide, we will discuss how to use an alligator indicator, its origin, components, advantages, and potential drawbacks.
What Is the Alligator Indicator?
The tool was first described by Bill Williams in 1995. It is quite popular and is included in the analysis packages of most terminals. You can easily find it on MT4, MT5, and other popular platforms. Despite its simplicity, it has certain pitfalls and a huge potential for traders.
Components of the Alligator Indicator
The indicator consists of three curves (moving averages) with specific settings. According to Bill Williams, the original shift and periods best predict the direction of the future trend. You can display it on the chart with the basic settings or adjust it according to your alligator trading strategy. Here are the default settings of the MAs:
- The green line (alligator lips): Period 5. Shifted by 3 periods.
- The red line (alligator teeth). Period 8. Shifted by 5 periods.
- The blue line (alligator jaws). Period 13. Shifted by 8 periods.
It is well seen that the green MA is the fastest and reacts to the market first. Now, let’s have a closer look at the alligator indicator components.
The Jaw (blue line)
The blue MA (alligator's jaw) is the 13-period moving average, shifted forward by 8 bars. This is the last line that starts moving. When it deviates from the price chart, the trend is likely already gaining strength.
The Teeth (red line)
The red MA (alligator's teeth) is the 8-period smoothed MA with a 5-bar shift into the future. It is a more sensitive line, so it starts to diverge earlier than the jaw.
The Lips (green line)
The last MA (alligator's lips) is green. The period is 5 and the shift is 3 bars. This is the most sensitive moving average that gives the first signal to traders.
Purpose and theory behind the Alligator Indicator
The William alligator indicator got its name due to some resemblance to the predator. Three moving averages create a shape similar to an alligator with a closed, slightly open, or open mouth. This vivid metaphor gives us a clear understanding of the mood and intentions of the alligator.
When you look at the three smoothed MAs, you can see the alligator's mouth or jaw. It is usually marked line in blue. The faster-moving average (the teeth) has an 8-period and shifted by 5 bars into the future. It is red. The shortest and fastest line is called the alligator's lips. It is green. Together, these three lines perfectly show the metaphorical alligator's character and determine the market’s movements in the near future.
How the Alligator Indicator Works
Let’s get the alligator indicator explained with the metaphor. When the alligator is full, it ignores the current market conditions. At this time, the moving averages are intertwined, so it is hard to differentiate them. During the alligator's rest, the sideways trend is the most common state of the market.
How will we see that the alligator is starving? When it starts hunting, the mouth begins to open. The jaws spread, teeth become visible, and the lips start moving to catch the food. On the price chart, we monitor the divergence of the three moving averages. The order of their waking up is as follows: the lips (green line), the teeth (red line), and the jaw (blue line). The MA with the longest period (13 bars) is the slowest.
As the alligator becomes hungrier, its mouth opens wider. This indicates a trend. Lines diverge, and the jaw moves away farther from the price curve. The end of the trend has an opposite representation on the chart. The lines approach each other and begin to intertwine. The mouth closes, and the alligator is waiting for the next hunt (trend) time.
Calculating the Alligator Indicator
MetaTrader 4 and other trading platforms use simple formulas for calculating the alligator indicator. In general, they calculate three MAs with the set periods and shifts. To do it manually, you should first determine the median price of each bar:
Median price = (High + Low)/2.
The next step is the calculation of the lines:
Jaw = Smoothed moving average (Median price, 13, 8).
Teeth = Smoothed moving average (Median price, 8, 5).
Lips = Smoothed moving average (Median price, 5, 3).
The second digit in parentheses indicates the period, and the third one ― the shift. You can build the lines manually or use special software. If you choose the second option, you’ll have to find the indicator in the menu and set the input data.
How to Read And Interpret Alligator Indicator
The question of “How to read alligator indicator?” is not that hard. The simplicity makes it one of the most favorite tools among Forex participants. Here are the main patterns you can see on the graph:
- The green MA is higher than the red MA, and the red MA is higher than the blue MA. They are all directed upwards. This is a sign of an expanding market. Probably, it is a good time to open long positions.
- The green line is under the red line, and the red line is under the blue line, while they are all directed downwards. This pattern indicates a bearish trend. Most probably, you can confidently open a short position.
- The lines are intertwined or approach each other. This is a flat period, and it’s better to stop trading and wait for the signal.
- The divergence between lines increases. This indicates the strengthening of the trend.
You should also know that the longer an alligator sleeps, the hungrier it becomes, and the future trend can be stronger.
Trading Strategies Using the Alligator Indicator
There is no one Williams alligator trading strategy. You can use the tool for different purposes and combine it with other instruments. However, you can try these approaches:
- Range trading. You can trade within the certain range indicated by the alligator.
- Breakout trading. The common strategy when price breaks through the range.
- Using rollbacks. You open a new position close to the previous one.
- Finding crossovers. When the bar closes below or above the three lines, you can enter the market.
An effective alligator strategy Forex can be developed if you monitor closely the indicator behavior, check different time frames, and get additional confirmations. It will improve consistently if you are fully committed to this method.
Alligator Indicator Best Settings
The alligator indicator is displayed on the price chart by three moving averages that have certain periods and shifts. They typically have default settings. The blue line period is 13, shift is 8. The red line period is 8, shift is 5. The green line period is 5, shift is 3. They can be increased or decreased slightly depending on your preferences.
The next important factor is a timeframe. It is best to trade with the Alligator indicator on H24 charts and higher. Even though theoretically it works on all timeframes, it is not recommended to go below H4 or at least H1. On the shorter frames, the indicator will give many false signals.
Advantages and Limitations of the Alligator Indicator
Traders can gain several advantages by utilizing the Williams Alligator Indicator. Here are the main benefits worth your attention:
- It provides a clear visual representation of market trends and makes it easy to spot potential reversals.
- The tool eliminates short-term fluctuations and helps identify strong trends.
- It gives simple rules of when to enter the market or hold the position.
For sure, this is not a perfect indicator, and it has its limitations. For instance, it can’t be used during the sideways movement. It is also ineffective in the short timeframes. Despite this fact, the Williams alligator is still a useful and common technical tool.
Using the Alligator Indicator in Forex Trading
Now that you know the general principles of the tool, it’s time to understand how to use alligator indicator in Forex. Here are some additional tips that help you incorporate the hungry predator into your strategy:
- Track several timeframes. This will allow you to gain a broader perspective of the market.
- Take into account market conditions. Explore the current sentiment and other factors.
- Combine it with other indicators. It is always useful to use more technical tools for more precise decisions.
- Constantly study the indicator and its correlation with the price. On different currency pairs, it can perform differently.
Last but not least: consistency and discipline are keys to mastering any technical indicator. Keep going to enhance your performance.
The Bottom Line
Many experienced traders consider the Forex indicator alligator a key instrument in their trading toolkit. It helps identify trend reversals with significant accuracy and improve the trading results. You can get even more profit if you combine the indicator with automation tools such as the best Forex robots. Use them to avoid manual work and make more accurate decisions.
