Hungry for-profit traders watch the direction of the market like hawks or like alligators. It is particularly true for electronic contracts because one can tell the estimated profit and loss from the beginning. The trader has to make a move: buy or sell.
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Alligator essence and parameters
Bill Williams believed that individuals and institutions tend to collect most of their profits during strongly trending periods, so he based Alligator indicator based on market psychology. It 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.
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.
Each moving average has its original name and is formed according to the following rules:
- Jaw (blue line): Starts with the 13-bar SMMA and is smoothed by eight bars on subsequent values.
- Teeth (red line): Starts with the eight-bar SMMA and is smoothed by five bars on subsequent values.
- Lips (green line): Starts with the five-bar SMMA and smoothed by three bars on subsequent values.
Click on the pencil image in the Olymp Trade terminal if you want adjust your settings for Alligator.
The alligator goes through 4 stages: Sleeping, waking up, hunting and falling asleep again.
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.
How to trade with the Alligator
The Alligator indicator can be used in any market or time frame. It is simple. You should identify the stage of the indicator and act accordingly.
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.
The general recommendations are:
- Call when the lines move up and are parallel. The expiration period is equal to 2 candles.
- Put when moving averages go down. The expiration period is 2 candles.
As 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. You should trade when the alligator is hunting. Stop trading when the alligator is falling into sleep when the lines unfold inward or intersect.
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.