The Alligator indicator is used to alert traders to the market trends and ranges.
It was invented by Bill Williams and uses 3 lines which are 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.
The Alligator indicator settings are:
- Green moving average = the lips of the Alligator
- Red moving average is the Alligator teeth
- Blue represents the jaws of the Alligator
We do not recommend using Alligator as the only indicator because it does not generate signals when to open a trading position. We recommend using all lines independently as resistance or support lines. Bill Williams has a great sense of humor and realistically described the 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 longer alligator’s sleeping, the hungrier he gets. This metaphorical description matches the theory of technical analysis. If the market stays flat longer, it will react to price changes stronger.
- The Alligator is waking up when the green line (the lips) crosses the red and blue lines – possible trend forming. He begins hunting for price. The lines divert and they look as if the mouth of alligator is open. It is important in which direction the alligator opens his mouth.
- The Alligator is eating when a candle closes above/below all 3 lines – you should be in the market. The alligator is going to sleep and “digest” the price. Closing jaws means completion of the trend. We recommend closing all positions and wait for the next hunt.
Bear Signal – Alligator Opens its Jaws
When you see jaws of the alligator opening, it is a signal to open a position. Later, the alligator will close its mouth – the intersection of the slow line and fast lines (mouth and teeth).
Algorithm of actions:
- Add an Alligator indicator to the price chart;
How to add Alligator Indicator the chart
How to set Alligator’s parameters
- Wait for the price chart and the slowest line (jaws, in red) of the indicator intersect;
- When the lips and the jaw cross it means that the mouth closed. Buy an option in the direction from the line of the jaw.
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.
When mouth closes, buy Put option
Advanced use of the Alligator indicator
We mentioned that lines of Alligator indicator could be used as support and resistance lines. When the price reaches the fast lip line (in purple), a signal is generated that the market will rebound. When the jaw line is not broken it means a strong signal.
Algorithm of actions during signal formation:
- Watch for the closing of the current candle on the lip line of the alligator or after it. It may be a signal;
- A signal is the formation of a candle away from the lines of the Alligator. A strong signal is the closing of the candle directly above the lip line;
- Confirm the signal by waiting for the next candle in the same direction. Buy an option in the direction of the trend.
Buy a Call option
In conclusion, the most important part of the Alligator is when the 3 lines are crossed. It means Alligator is sleeping and no trading signals are present. 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. Good luck!
