Alligator Indicator

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Williams Alligator Indicator

What Is the Williams Alligator Indicator?

Legendary trader Bill Williams, an early pioneer of market psychology, developed the trend-following Alligator indicator, which follows the premise that financial markets and individual securities trend just 15% to 30% of the time while grinding through sideways ranges the other 70% to 85% of the time. Williams believed that individuals and institutions tend to collect most of their profits during strongly trending periods.

Key Takeaways

  • The Williams Alligator indicator is a technical analysis tool that uses smoothed moving averages.
  • The indicator uses a smoothed average calculated with a simple moving average (SMA) to start.
  • It uses three moving averages, set at five, eight, and 13 periods. The three moving averages comprise the Jaw, Teeth, and Lips of the Alligator.
  • The indicator applies convergence-divergence relationships to build trading signals, with the Jaw making the slowest turns and the Lips making the fastest turns.

How the Willaims Alligator Indicator Works

The Alligator indicator uses three smoothed moving averages, set at five, eight, and 13 periods, which are all Fibonacci numbers. The initial smoothed average is calculated with a simple moving average (SMA), adding additional smoothed averages that slow down indicator turns.

Calculation of the Alligator Indicator

Simple moving average (SMA):

SUM1 = SUM (CLOSE, N)

Subsequent values are:

PREVSUM = SMMA(i-1) *N

SUM1 – the sum of closing prices for N periods;

PREVSUM – smoothed sum of the previous bar;

SMMA1 – smoothed moving average of the first bar;

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SMMA(i) – smoothed moving average of the current bar (except for the first one);

CLOSE(i) – current closing price;

N – the smoothing period.

How the indicator is calculated is important for understanding the inner workings of the indicator. Luckily, the calculation is not required in practice. The Alligator indicator can be added to your charts from the indicator list in your charting or trading platform.

The three moving averages comprise the Jaw, Teeth, and Lips of the Alligator, opening, and closing in reaction to evolving trends and trading ranges:

  1. Jaw (blue line): Starts with the 13-bar SMMA and is smoothed by eight bars on subsequent values.
  2. Teeth (red line): Starts with the eight-bar SMMA and is smoothed by five bars on subsequent values.
  3. Lips (green line): Starts with the five-bar SMMA and smoothed by three bars on subsequent values.

Williams invoked barnyard imagery to describe the indicator, noting “even a blind chicken will find its corn if it is always fed at the same time . it took us years but we have produced an indicator that lets us always keep our powder dry until we reach the blind chicken’s market.”

Special Considerations

The indicator applies convergence-divergence relationships to build trading signals, with the Jaw making the slowest turns and the Lips making the fastest turns. The Lips crossing down through the other lines signals a short sale opportunity while crossing upward signals a buying opportunity. Williams refers to the downward cross as the alligator “sleeping” and the upward cross as the alligator “awakening.”

The three lines stretched apart and moving higher or lower denote trending periods in which long or short positions should be maintained and managed. This is referred to as the alligator “eating with mouth wide open.” Indicator lines converging into narrow bands and shifting toward a horizontal direction denote periods in which the trend may be coming to an end, signaling the need for profit-taking and position realignment. This indicates the alligator is “sated.”

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. Remain on the sidelines until it wakes up again. This exposes a significant drawback of the indicator because many awakening signals within large ranges will fail, triggering whipsaws.

Example of the Williams Alligator Indicator

Facebook, Inc. (FB) has an alligator “awakening” signal near the bottom left of the chart, then embarks on a strong uptrend that shows an alligator “eating with open mouth” phase. On the rise, the price drops to the Jawline, but the indicators do not cross each other. The trend remains up. An alligator “sated” sell signal arrives when the Lips cross below the Teeth and Jawlines and lines intertwine as the price moves sideways.

The alligator “sleeps” for some time before a new awakening signal goes off, and uptrend commences with another “eating with an open mouth” phase. The price continues to rise but in a weak fashion. Then there is a sell-off and the mouth opens to the downside, signaling a downtrend. The lines cross again, signaling that the alligator is “sated.” Until the mouth opens again, remain on the sidelines.

The Alligator indicator can be used in any market or time frame. Next is an example of the EUR/USD currency pair.

In the lower-left of the chart, the Alligator opens up, and an uptrend remains in place for some time. The lines then cross, and two small downtrends develop. This is followed by a buy signal to the upside, which results in a brief uptrend. As the price pulls back, the Alligator is sated, and then it opens again for a big uptrend. This is followed by an extended sideways period, in which the indicator lines crisscross back and forth. This is a sleeping phase, and most traders are best to stay away. At the far right of the chart, the Alligator is opening its mouth again, or awakening, signaling a downtrend.

Bill Williams’ Alligator indicator provides a useful visual tool for trend recognition and trade entry timing, but it has limited usefulness during choppy and trendless periods. Market players can confirm buy or sell signals with a moving average convergence divergence (MACD) or another trend identification indicator.

Learn About The Alligator Indicator

Last updated on February 20th, 2020

The Alligator indicator was invented by Bill Williams and uses 3 lines which are actually moving averages with a spin.

Markets trend and market range and the 3 lines of the Alligator indicator, known as the jaws teeth and lips, is designed to alert traders to the presence of either of those market states

From those states, a trader can determine if they will use a range trading strategy, a trend trading strategy, or wait for a breakout strategy to be used.

What Is The Williams Alligator Indicator?

Three smoothed moving averages are used however they are displaced moving averages. This simply means that the reading is adjusted X bars into the future which better forecasts the future trend direction.

The Alligator indicator settings are:

  • Green moving average = the lips of the Alligator and is set to 5 and displaced into the future by 3 periods (whatever your time frame is)
  • Red moving average is the Alligator teeth and is set to 8 periods and is pushed 5 periods into the future
  • Blue represents the jaws of the Alligator and is set to 13 periods and displaced 8 periods into the future

Alligator Indicator Forex Example

There are custom indicators for various charts, including Metatrader, to make it easy to apply these averages to your charts.

How Does The Alligator Indicator Work?

Since the market evolves from trend to range, we can think of the market much like an Alligator:

  • When the market is ranging, the Alligator is sleeping
  • When the market shows signs of a trend, the Alligator wakes up

You monitor the condition of the 3 lines to determine what state the “Alligator” is in.

There is no trend in the market

When the 3 lines are intertwined, we do not have a trend. This is generally a time of low volatility and most traders may want to find another instrument to trade

Possible trend forming

The lips of the Alligator, the green line, is the fastest moving average and will be the first one a trader will want to monitor. You want to see the green line cross both of the slower moving averages. This is a sign that the Alligator is waking up.

We will also see the lips and the jaw start to turn in the direction of the green line. Many traders will enter the market following a candle close above/below all 3 lines at this point.

Trend formed and direction

Considering an up trend, the green line (lips), crosses the red and sometimes the blue line depending on the market state. The red line (teeth) starts to head upwards crossing the blue (jaw) line and we now determine an uptrend is in place.

Alligator Indicator Explained

Here is a great analogy which will help you decide when a trading opportunity could be presenting itself:

When the 3 lines of the Alligator indicator are intertwined, the Alligator is sleeping. When an Alligator is sleeping, nothing interesting is going on. The longer the Alligator sleeps, the hungrier it may be when it awakes.

Think of a market that is ranging – we know it will break out and the longer the range continues, the more violent the breakout can be

As the green line starts to cross (the lips opening), we could be looking at an Alligator getting ready to feed. This is the time that you want to be on alert for a trading opportunity.

As the green line continues in one direction, the red line which represents the teeth of the Alligator, begins to separate and move in the same direction – the teeth are opening.

Once the first 2 lines start to pull away from the blue line, the blue line trends in the same direction – the Alligator has opened it’s jaws and is looking to feast. The trader is looking to feast on the price action that is happening.

Stages Of The Alligator Indicator

  • If the lips (green line) cross the teeth (red) and jaws (blue line) to the upside, consider a bullish Alligator and look for long trades
  • When the lips cross the teeth and jaws to the downside, consider looking for short trades as we have a bearish Alligator potential

At this point, you have learned how to setup and use the Williams Alligator to determine the state of the market and the trend direction.

There are several trading strategies you can use and keep in mind that all indicator based strategies do lag the market.

Trading With The Alligator Indicator

The indicator alerts us to 3 stages of market development and with understanding those, you can design a simple approach to trading the market:

  • The Alligator is sleeping when the 3 lines are intertwined – market is a rest
  • The Alligator is waking up when the green line (the lips) crosses the red and blue lines – possible trend forming
  • The Alligator is eating when a candle closes above/below all 3 lines – you should be in the market

You must keep in mind that since we are using displaced moving averages, each of the 3 lines will be plotted ahead of price by the factor of the displacement – 3, 5, and 8 periods. This may affect the trading strategies you use.

Trading Ranges and Breakouts

When the Alligator is sleeping, the market is range bound and a range trading strategy may be used which can give you a jump into the market early.

You can see in this graphic the 3 lines mixed together. When this occurs, section of the previous high and low and using your entry tactics, trade inside the range.

Range Trading – Alligator Indicator

Also note on the far right, price has broken from the range and pulled back – classic breakout/pullback trade. At the same time, the spacing of the Alligator lines is supporting your short trade

Trading Pullbacks In Price

Once the lines have shown a direction, you can resort to using a price pattern that is a staple of all traders – pullbacks.

You want to see all lines pointed in the same direction, in order, which shows a trend is underway. Unlike the first strategy, trading pullbacks in a maturing trend does pose risks as the trend may run before giving a trading opportunity

You can determine the length of pullback needed by choosing where price has to pull back to. Here you can see obvious pullbacks that have pulled to the green and red line while the blue kept the upwards slope.

The horizontal line is not a perfect pullback but the tail on the lower green candlestick is a price action reversal near the first pullback low.

On the far right, you can see this pullback failed however there was not break above the yellow line before price began to close under the 3 lines.

Alligator Line Cross

The simplest trading strategy for the Alligator is to trade the close of a candlestick after it crosses the lines. I would suggest that traders look at support and resistance to ensure the buy and sell signal is not right into a previous cluster of price.

Candlestick Cross and Close

Note the the green line has crossed over the red to the downside. Remember, these lines are displaced into the future and would have plotted in front of the candlestick we are shorting.

  • Green line has crossed the red to the downside
  • Short at the low of the candlestick that closed below all 3 lines
  • Close your position when a candlestick closes above all 3 lines

As for a stop loss when using the Alligator, consider using a multiple of the average true range or use previous swing high and lows.

In Closing

The most important part of the Bill Williams Alligator is when the 3 lines are mixed together. This is when the Alligator is considered to be sleeping and no trading signals are present.

You should keep these instruments on your radar especially if price action is hinting at an increase in momentum. The best time to get on board a trend move is just before it happens.

While you may not be able to pick the exact price the trend begins, getting in as close to the beginning as possible should be your goal

When the Alligator is feeding, watch for pullbacks against the main trend direction and trade those moves with a pullback strategy.

As with any trading strategy, it is vital that you test it, lay out a trading plan, and ensure risk management is priority one.

Alligator Indicator Explained – What is the Alligator Indicator?

Bill Williams introduced the Alligator indicator in 1995. The Alligator is as much a metaphor as it is an indicator. It consists of three lines, overlaid on a pricing chart, that represent the jaw, the teeth and the lips of the beast, and was created to help the trader confirm the presence of a 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 satiated, the Alligator closes his mouth once again and goes to sleep.

Alligator Formula

The Alligator indicator is common on Metatrader4 trading software, and the calculation formula sequence involves these straightforward steps:

1) The Alligator’s Jaw, the “Blue” line, is a 13-period Smoothed Moving Average, moved into the future by 8 bars;

2) The Alligator’s Teeth, the “Red” line, is an 8-period Smoothed Moving Average, moved by 5 bars into the future;

3) The Alligator’s Lips, the “Green” line, is a 5-period Smoothed Moving Average, moved by 3 bars into the future.

Software programs do the hard work and produce a chart similar to the one below:

The Alligator indicator is composed of three smoothed moving averages. Traders will occasionally add an “Oscillator” like the “CCI”, as above in Aqua, to enhance the value of the trading signals. In the example above, the “Jaw”, “Teeth”, and “Lips” are entwined while the Alligator sleeps during the initial part of the price action depicted. When the Alligator awakes, the Green line moves first, followed by the Red line, to confirm a breakout in a new direction. In this example, the CCI sent an overbought alert first. The Alligator lagged, but confirmed the signal after a Candle closed beneath the three-line set. The weakness in the indicator is that timing may “lag” due to its future positioning, the reason for attaching a momentum indicator to anticipate the Alligator’s signal.

The Alligator indicator helps the trader stay in the position for a longer period and works best the longer the period of sleep. In the above example, you would stay in the trade until a Candle closed above the middle Red line. Williams also developed a “Gator” histogram indicator to help visually with interpretation, and many other traders have added their own “twist” to enhance the reliability of this indicator.

The next article in this series on the Alligator indicator will discuss how this indicator is used in forex trading and how to read the various graphical signals that are generated.

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.

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