Alligator Indicators

The Alligator Indicator is a tool created by Bill Williams to help traders spot trends and reversals in the market. It’s used in various markets like stocks, forex, and crypto. The Alligator consists of three smoothed moving averages called the Jaw, Teeth, and Lips. These lines help you see whether the market is trending or ranging, making it easier to decide when to enter or exit a trade.

How is the Alligator Indicator Calculated?

The Alligator Indicator uses three different moving averages:

• Jaw: a 13-period smoothed moving average, shifted 8 bars into the future.

• Teeth: an 8-period smoothed moving average, shifted 5 bars into the future.

• Lips: a 5-period smoothed moving average, shifted 3 bars into the future.

These moving averages create a visual representation of the Alligator’s mouth opening and closing, which signals different market conditions.

The calculation begins with the value of simple moving average, and further, it is calculated by a formula:

(SMMAi) = (SUM(1) – (SMMAi-1) + PriceMedian(i)) / N

where

• SMMA(i) — smoothed value of the current bar (without the price of the first);

• SUM(1) — the sum of PriceMedian within N periods (since the previous bar);

• (SMMAi-1) — smoothed value of the previous bar;

• PriceMedian (i) — the average price of the current bar.

Three dynamic lines appear on the price schedule:

• SMMA (MedianPrice; 13; 8) – the smoothed 13-period moving average displaced on 8 bars forward; the author’s name − AlligatorsJaw, color by default – blue.

• SMMA (MedianPrice; 8; 5) – the similar moving average displaced on 5 bars forward; AlligatorsTeeth, color – red.

• SMMA (MedianPrice; 5; 3) – the moving average displaced on 3 bars forward; AlligatorsLips, color – green.

Once again, you don't need to learn all of that right now. You just need to understand how it works. Let me explain it simplier.

How to Read the Alligator Indicator

• Sleeping Alligator:

  When the Jaw, Teeth, and Lips are intertwined and flat, the Alligator is "sleeping." This indicates a ranging or sideways market with no clear trend.

• Awakening Alligator:

  When the Jaw, Teeth, and Lips start to spread apart, the Alligator is "awakening." This signals the beginning of a new trend.

• Alligator Eating:

  When the Jaw, Teeth, and Lips are moving in the same direction and are separated, the Alligator is "eating." This shows a strong, ongoing trend.

Using the Alligator Indicator in Trading

1. Identify Trend Direction:

   • Uptrend: when the Lips are above the Teeth and Jaw, and all three are moving upwards.

   • Downtrend: when the Lips are below the Teeth and Jaw, and all three are moving downwards.

2. Spot Reversals:

   • Look for the Alligator’s mouth to start closing (lines coming together) as a sign that the current trend might be ending.

   • When the Alligator’s mouth opens again in the opposite direction, it can signal a new trend starting.

For BUY:

For SELL:

Combine with Other Indicators:

• Use the Alligator with indicators like RSI or MACD to confirm signals and improve accuracy.
• For example, if the Alligator signals an uptrend and the RSI shows the market is not overbought, it could be a strong buy signal.

Practice Exercise:

Put your knowledge to the test with this exercise.

Objective: Use the Alligator to identify signals.

Scenario: EUR/GBP trading pair (or any other) on a 24-hour chart.

1. Set Up the Alligator Indicator:

   • Open your trading or backtesting platform ans set the parametres as in the scenario. Choose any asset. As I said before, you can use any asset (let it be Forex, stocks, crypto, or commodities).

   • Add the Alligator Indicator to your chart. By the way, some platforms may not have all indicators that I describe here. Unfortunately. if you don't find the indicator you need for the exercise, try finding it on other platforms.

2. Identify Signals:

   • Look for the Alligator’s mouth opening and closing.

   • Spot when the Alligator starts "awakening" or "eating" to identify potential trend starts.

   • Watch for the Alligator’s mouth to close as a sign of possible trend reversals.

3. Make Demo Trades:

   • Use the signals from the Alligator to enter and exit trades on a demo account.

   • For example, buy when the Alligator starts eating upwards and sell when it begins to close.

4. Analyze Your Trades:

   • Note how often the Alligator’s signals lead to profitable trades.

   • Adjust your strategy based on what you observe. Maybe combine it with another indicator for better results.

This is one of my favorite indicators. First, it's useful. Second, it's fun.