Trading with the Alligator Indicator

What Is the Williams Alligator Indicator and How to use the Alligator Indicator in Forex Trading?Alligator Definition and Chaos Theory in Forex.

 

What is the Alligator Indicator?


The Alligator Indicator, based on Chaos Theory and applied to financial markets, is one of the technical analysis tools. Developed by well-known market figure and author Bill Williams, the Alligator Indicator utilizes the core concepts of Chaos Theory to identify market trends and possible reversal points. This indicator assists us in determining market trends, pinpointing entry and exit points, and staying away from trades within a horizontal channel. Inspired by the behavior of an alligator, Bill Williams named this indicator “Alligator”. The Alligator Indicator consists of a combination of three moving averages, calculated by shifting these moving averages over specific periods. These three balance lines are as follows:

  1. Alligator’s Lips (Green Line): 5-period simple moving average (SMMA - Smoothed Moving Average).
  2. Alligator’s Teeth (Red Line): 8-period simple moving average (SMMA - Smoothed Moving Average).
  3. Alligator’s Jaw (Blue Line): 13-period simple moving average (SMMA - Smoothed Moving Average).

The indicator provides information about the strength and direction of the trend based on the movement and convergence or divergence of these three lines. The usage of the Alligator Indicator often relies on the intersections and divergences of these three lines. If the three lines converge, the Alligator is either quiet (underwater) or asleep. This indicates an uncertain market condition and suggests staying away from trades. (See example visual a.) As the waiting period prolongs, the Alligator will become hungrier. When the Alligator awakens from a deep slumber, it will swiftly move towards more distant price levels, resulting in significantly impactful price movements.

Alligator Indicator being used in Forex Trading. Alligator's Lips (Green Line), Alligator's Teeth (Red Line) and Alligator's Jaws (Blue Line) play the role of Support and Resistance on the EUR/USD price chart.
Williams Alligator in the EUR/USD chart

In a period when the Alligator is awake, the market becomes more lively and volatile. During this time, the positions of the Alligator’s jaw, teeth, and lips provide more clues about the strength and likely direction of price movements. When the Alligator awakens, it seeks to hunt, meaning prices will move within a trending direction, either upwards or downwards. If prices are arranged above the Alligator’s mouth, it heralds an upward trend. In this scenario, prices generally continue to rise. (See example visual b.) On the other hand, if prices are below the Alligator’s mouth, it indicates a downward trend. In this case, prices show a tendency to fall, suggesting an overall selling pressure in the market. (See example visual c.)



How to Trade?


When these three lines (blue, red, and green) are moving upwards and the gap between them is increasing, it indicates that the market is dominated by bulls and a strong uptrend is forming. Traditionally, if the green line crosses above the red and blue lines, it signifies a Buy signal. During this time, the candlesticks begin to align above the Alligator’s mouth (formed by its lips, teeth, and jaw). Similar to other indicators, the Alligator Indicator also provides signals with a delay. By the time the Buy order is placed, the trend has already begun, but it’s considered safer and less risky. To capture the signal early, some traders employ different strategies. For example, they wait for the green line to cross the red line and then for a candlestick to close above the red line before placing a Buy order. In an uptrend, these three lines play the role of support levels. Candlesticks often cross the green line (first support level) from above to below, which is considered a retracement. However, if candlesticks cross the red line (second support level) from above to below, it indicates a weakening of the uptrend. Accordingly, we should definitely place a Stop Loss order below the red line.

If these three lines (blue, red, and green) are moving downwards and the gap between them is increasing, it indicates that bears are dominating the market and a strong downtrend is forming. In the classic scenario, if the green line crosses below the red and blue lines, it signifies a Sell signal. During this time, candlesticks begin to align below the Alligator’s mouth (formed by its lips, teeth, and jaw). To capture the early stages of a downtrend, we can place a Sell order by waiting for the green line to cross below the red line and then for a candlestick to close below the red line. In a downtrend, these three lines play the role of resistance levels. Candlesticks often cross the green line (first resistance level) from below to above, which is considered a retracement. However, if candlesticks cross the red line (second resistance level), it indicates a weakening of the downtrend. Therefore, it’s more sensible to place a Stop Loss order above the red line.


Please note. While the information that the Alligator Indicator provides us with in our analysis can help us understand market movements and make more informed trading decisions, if we use it alone, sometimes we may not get the results we want. This is true not only for the Alligator Indicator, but for all indicators. We should always combine it with other methods of analysis and market information.


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