A famous American trader Bill Williams invented the Alligator Indicator to identify the presence or absence of a trend. It also helps telling traders a trend may be forming. Finally, it also indicates the direction of such a trend.
Bill Williams loved animals and that’s why chose such an aggressive name for the indicator. The alligator analogy helps describing market situations from non-trending to trending. Williams described flat market like a sleeping alligator. Eventually the alligator wakens and sets off in pursuit of its prey. The longer it has slept, the hungrier it gets. Eventually, the alligator will be hunting.
How to determine the trend and its direction? How to read the signals? You have to learn how to use the Alligator indicator for determining market situation. By the way, the Pocket Option includes the Alligator Indicator in the set of standard tools.
How to set the Alligator Indicator?
The Alligator is a trend indicator displayed on the chart. Visually, it represents three moving averages. The balance lines are designated as the jaw, the teeth, and the lips of the alligator and are as follows:
- Alligator’s lips (a green line). It is a 5-period smoothed moving average, displaced 3 periods to the right.
- Alligator’s teeth (a red line). It is an 8-period smoothed moving average, displaced 5 periods to the right.
- Alligator’s jaws (a blue line). It is a 13-period smoothed moving average, displaced 8 periods to the right.
Beginners in trading should use standard settings for the period and deviation. The indicator will predict the price movement in advance and ignore the market noise.
Here are some recommendations for period/shift:
- Jaws: 13/8
- Teeth: 8/5
- Lips: 5/3
To change the settings in the Pocket Option terminal, you need to click on the “Indicators” and select “Active.” Then click on the “pencil” opposite the Alligator. The Pocket Option terminal uses blue, red, green colors for the moving averages. If you want, you can change colors.
Signals from the Alligator Indicator
As mentioned above, the Alligator is great for predicting the future direction of the price. It can do even more: it can generate to buy a contract and to stop trading. By looking at the balance lines, we can determine the structure of the market — in other words, whether we are dealing with a sleeping alligator or not. There are four stages of the Alligator:
- Alligator’s Sleeping. The market is flat: do not buy.
- Alligator Awakens. Lines start to move: prepare for trading.
- Alligator’s Hunting. Market starts to move: best time for trading.
- Alligator falls asleep. Lines come closer: the market slows down.
How to interpret Alligator indicator?
When the Jaw, the Teeth, and the Lips are intertwined, it means the Alligator is asleep and there’s no uptrend or downtrend at the market. Bill Williams recommends staying out of the market during such periods. The longer the Alligator sleeps, the hungrier it wakes. When it wakes up from a long sleep, it opens its mouth (moving averages diverge) and gets ready to take a big bite of the market. It’s time to trade! The Alligator will chase the price far away and offer a decent profit to a trader. Having eaten enough, the Alligator goes back to sleep (moving averages converge), so it’s time to take profit.
- Call when the Alligator is hunting and lines are moving up.
- Put when the Alligator is hunting and lines are moving down.
You can apply any timeframe but the expiration period must be set at least 4 candles.
- If the price is above the Alligator’s mouth then it’s an uptrend. The indicator lines take a bullish order (green on the top, then red, then blue).
- If the price is below the Alligator’s mouth then it’s a downtrend. The Alligator’s lines take a bearish order (blue on the top, then red, then green).
In conclusion, we should say that there are many different combinations between Alligator and other tools of technical analysis. The Alligator is a ready-for-use trading system that can be accompanied by other analytical tools for the greater precision of trading. When you use the Alligator, check several timeframes of the chart to see which one would work better. Happy hunting with the Alligator!