Alligator indicator is a trading tool created by Bill Williams. It is often used to confirm the ongoing trend in the market and its direction. Traders also used this Indicator to trade the counter-trend moves in the market. Alligator Indicator consists of three moving averages.
The Alligator Analogy
Wondering why this indicator is called Alligator? It is because of this reason. This indicator is designed to describe the behaviour of the market. When the market is in a range (When it is moving sideways), it means that the Alligator is sleeping. The longer the ranging market, the longer the Alligator has slept. The longer it rests, the hungrier is the beast. In other words, stronger market moves are expected soon.
The Three Balance Lines
The balance lines in this indicator are designated as the teeth, the lips, and the jaw of the Alligator.
Alligator’s teeth – It is the intermediate moving average, and by default, it is Red in colour. It is an 8-period moving average, shifted 5 bars forward.
Alligator’s lips – It is calculated as a 5-period moving average and shifted by 3 bars forward. It is Green in colour.
Alligator’s jaw – It is the slowest moving average, and it is marked in Blue by default. It is a 13-period moving average, shifted forward by the 8 bars.
Installing the ‘Alligator Indicator’ in MT4 (Step-by-step process)
This indicator is available in MT4 terminal by default. Click on Insert < Indicators < Bill Williams < Alligator
Once you click on the Alligator indicator, a box will pop-up where you get to change the colour of the SMAs and its corresponding parameters. We suggest you go with the default settings. Once you click the “OK”, the blue jaws, green lips and the red teeth will appear on your chart.
We have applied our Alligator Indicator to the below USD/CHF 15-minute chart.
The Alligator indicator identifies the three crucial stages of market development. With the understanding of these three market stages, you can design your own plan to trade.
- The market is considered to be in a resting phase when all the three lines of the Alligator indicator are entangled.
- The market is in the initial phase of forming a trend when the green line crosses the red line.
- The market is ready to move when the candles close above or below all three lines.
Alligator Indicator and Ranges
When all three lines of the Indicator are intertwined, it means that the market is in a range. So ranges can be easily identified and traded using this indicator.
As you can see in the below chart, when all the three lines of the Alligator are intertwined, the market turned into a range and gave us a couple of buy/sell signals.
Alligator and Stochastic Strategy
In this strategy, we are going to combine the Alligator indicator with the Stochastic. Stochastic is an oscillator which we plot at the bottom of the chart, and the Alligator is plotted on top of the candles. In this strategy, we are going to use the overbought and oversold areas of the Stochastic and the crossovers of the Alligators to identify the buy and sell signals.
So the idea is to see if the Stochastic indicator is giving a sharp reversal once it reaches the overbought or oversold areas. At the same time, if the Alligator indicator lines are crossing each other near the candlesticks, that can be considered as a buy/sell signal.
In the below chart, when the Stochastic indicator reached the overbought area and gave a sharp reversal, the Alligator indicator lines are crossing over on top of the candlesticks. This can be considered as a potential sell trade. Place the stop-loss above the recent high and use the recent low to place your targets.
In the below chart, when the Stochastic indicator reached the oversold area and gave a sharp reversal, the Alligator indicator lines crossover happened near the candlesticks. This is a potential buy signal for us. Exit your trades at the recent high, or if the trend is super strong, you can go for deeper targets.
Alligator is a momentum-based lagging Indicator. The crucial part of the Indicator is its ability to indicate the ongoing market trend and its direction.
When all the three lines are crossing over each other, it indicates that the Alligator is sleeping and the market is range-bound. Always remember to see if the green line is crossing over the red line. That is a prior sign of the trend getting active very soon.
When all the three lines of this indicator close above/below the price, it means that the Alligator is awakened and is ready for its prey. Just like any other momentum indicator, it is always better to use this in conjunction with other indicators in order to get accurate signals.
We have shared two strategies above, one for the ranging market, and the other for the trending market. Also, if you can, backtest your strategy on a simulator before applying it to the real market. Got more ideas on how we can combine Alligator indicator with other momentum indicators? Please let us know in the comments below. Happy trading!