Bill Williams introduced the Alligator indicator in 1995. The Alligator indicator consists of three lines, overlaid on a price chart, the represents the jaw (blue line), the teeth (Red Line) and the lips (green Line) of the beast, and was created to help the trader confirm, the presence of the trend and its direction. The Alligator indicator can also help traders designate impulse and corrective wave formations, but the tool works best when combined with a momentum indicator.
The traits of the Alligator are numerous. If the three lines are entwined, then the Alligator’s mouth is closed and he is said to be sleeping. As he sleeps, he gets hungrier by the minute, waiting for a breakout from his slumber when he will eat. When the trend takes shape, the Alligator wakes and starts eating. Once satisfied, the Alligator closes his mouth once again and goes to sleep.
The Alligator indicator composed of three smoothed moving averages, set at five, eight, and 13 periods, which are all Fibonacci numbers. Traders will occasionally add an “Oscillator” like the “CCI” to enhance the value of the trading signals.
The Alligator indicator helps the trader stay in the position for a longer period and works best the longer the period of sleep.
The indicator will flash false positives when the three lines are crisscrossing each other repeatedly, due to choppy market conditions. According to Williams, the alligator is sleeping at this time, telling market players to remain on the sidelines until it wakes up once again.
Like all the moving Averages, the alligator is a lagging indicator. Such a lag in getting a trade signal leads to a partial loss of profit. Further, this lag functions as a filter and helps eliminate insignificant and false signals.
To Conclude:
- A Buy signal in Alligator is generated when the following conditions is satisfied..,
- All three MA’s are separated.
- The price is above the 5 MA, 5 MA is above 8 MA, and 8 MA is below 13 MA.
- Once the above condition is satisfied, it means that the asset is trending up.
- When the uptrend is established, it is upto the trader to identify a good entry point within this trend.
- A Sell signal is generated when the following condition is satisfied..,
- All three MA’s are separated.
- The price is below the 5 MA, 5 MA is below 8 MA, and 8 MA is below 13 MA.
- Once the above condition is satisfied, it means that the asset is trending down.
- When the down trend is established, it is upto the trader to identify a good entry point within this trend.
