A small group of traders rose to prominence when retail forex trading became feasible in the 1990s. These traders were dubbed "champions of the art form."
One of his favorite devices was the Alligator Indicator, which debuted in 1995 and conjured up open jaws and feeding time images in the mind's eye.
Obtaining a competitive advantage in the market is widely considered the most effective method of achieving success in the forex market, and technical indicators are the tools of the trade.
The alligator indicator is a technical analysis technique used to determine the creation of a trend in forex trading. It is also known as the Williams indicator or the alligator indicator. Its primary function is to identify trends and calculate entry and exit opportunities for your forex trade.
Legendary trader Bill Williams, an early pioneer of market psychology, created the trend-following Alligator indicator, which is based on the idea that financial markets and individual securities trend only 15% to 30% of the time while grinding through sideways ranges the remaining 70% to 85% of the time. Williams argued that individuals and institutions gathered the majority of their profits during eras characterized by strong trends. Bill Williams, an American author, created the indicator and first wrote about it in 1995.
Bill M. Williams (1932-2019) was renowned for his trading expertise in stocks, commodities, and foreign exchange and his numerous works on technical analysis, trading psychology, and chaos theory.
However, he is more renowned for the numerous technical indicators he built throughout time to give his proposed theories fundamental functionality. One of his favorites was the 1995-introduced Alligator Indicator, which utilized the concept of open jaws and feeding time to maximize market entry positions. Technical indicators are the trade instruments for gaining a competitive advantage in the foreign exchange market, as gaining a market advantage is widely regarded as the most effective strategy for achieving success in this market.
The Alligator indicator is a well-regarded instrument for forex traders. It is a typical feature in the vast majority of trading platforms, such as MetaTrader 4 (MT4) and other proprietary systems. The alligator serves as both a metaphor and an indicator. It consists of three lines superimposed over a pricing chart, which symbolize the beast's jaw, teeth, and lips, and was designed to help traders confirm the presence and direction of a trend.
Numerous traits or behavioral qualities define the alligator. Typically, they consist of four separate phases:
If the three lines are parallel and intertwined, the alligator's mouth is closed, and he is considered to be asleep.
As he sleeps, he grows hungrier by the minute, awaiting his awakening in order to consume food.
When a trend emerges, the alligator awakens and begins eating.
Once full, the alligator seals his mouth and goes back to sleep.
What is the purpose of the alligator indicator?
Similar to numerous other trend trading indicators, the alligator indicator plots multiple moving averages (MAs) on a chart. Each of the three moving averages depicts a different component of the "alligator":
The blue line represents the jaw.
The red line represents the teeth.
The green line represents the lips.
These are the platform's default colors, which are frequently modifiable.
Using the following analogy, the indicator's operation can be described when the alligator's jaw, teeth, and lips are closed (moving average lines are entwined). Many traders avoid taking a position at this time because the trend is too weak.
The longer an alligator slumbers, the hungrier it becomes; it is prepared to hunt bears and bears when it awakens. The alligator opens its mouth (lines uncross and move upwards or downwards) and consumes food until it is full.
Now that the alligator is no longer interested in eating, it closes its mouth to rest (lines move closer together). Some traders will close their profitable positions at this time, as the rising or downward trend may have halted.
What Does the Alligator Indicator Reveal?
The Alligator Indicator employs the previously mentioned smoothed moving averages of 5, 8, and 13. Given that these are all Fibonacci numbers, it is logical that the indicator will be shrouded in a certain level of mystique, as many traders adore the concept of employing Fibonacci.
The Jaw is the 13-bar moving average that has been smoothed using eight bars of previous readings. The Teeth is the 8-bar moving average that has been smoothed by five bars of prior data. The Lips display a five-bar smoothed moving average that is further smoothed by three bars on prior values. This will plot a green moving average (5), a red moving average (8), and a blue moving average (13)
The indicator that searches for convergence/divergence in order to provide signals. The Jaw (blue) turns more slowly than the others, while the Lips (green) will be the indicator's quickest moving average. The triple indicators are utilized similarly to a three-moving average server system as a result. For instance, a sell signal is generated if the green indicator breaks through the other two to the downside. Conversely, if the green indicator surpasses the other two to the upward, this is a bullish sign and a possible purchase recommendation.
Bill Williams hypothesized that the alligator was asleep when the downward cross happened, and an upward cross signifies the alligator waking up. Whether he refers to it as a triple-moving average crossover system or something else is probably not all that significant, as the system will adhere to many of the same principles. In the end, that is all this is, but there are some adjustments to the computations due to their smoothing.
If the three moving averages are separated, it is often an indication that you are in a trend and that you should retain your current position. In the example provided below, you can see that the moving averages go from being twisted to somewhat widely dispersed at the first red arrow, compress, and then disperse even further at the second red arrow.
At both of these arrows, the Alligator Indicator indicates that the market is extremely bearish and that short positions should be maintained. In fact, one may argue that the compression between the two red arrows is insufficient to eject one from the initial position.
The Alligator Indicator reveals a significant downward trend. The indicator indicating a pair of significant downtrends would be the first thing he would notice, but he would then ask whether you are extremely cautious or a bit more adventurous. In other words, if you are already short of the currency pair, the indicator's Lips rising above the Teeth or the green moving average penetrating the red moving average between the two arrows could indicate starting to take profits. At this stage, it is essentially a matter of personal preference, and traders use both approaches when employing the Bill Williams Alligator Indicator.
According to Bill Williams's own account, there are other ways to describe what is occurring. When the moving averages are short and choppy, he will frequently say that the market is sleeping or that the alligator is "satiated." When the three moving averages begin to diverge and move in the same direction, the mouth of the "alligator" opens, and it begins to spread. There are blue, red, and orange boxes in the chart immediately below.
The moving averages begin to spread and climb in the blue boxes, which is a very bullish sign. The orange boxes depict choppy trading circumstances with the moving averages, indicating that you are either flat on the market or attempting to profit from a previous position. The red rectangle represents the alligator's mouth as it eats again, this time driving downwards.
How is the Alligator indicator calculated?
The Alligator indicator is commonly found on the Metatrader4 trading platform, and its calculation algorithm consists of the following steps:
The author gave these three lines simple and intriguing names: "Jaws," "Teeth," and "Lips." Median Price = (High + Low) / 2, where High is the maximum of this bar (candle), and Low is its minimum (candle).
Alligator's Teeth (blue line)
This is the Balance Line for the time period from which the chart was constructed. The line represents a 13-period moving average displaced by 8 bars on the chart; it is typically depicted in blue.
Alligators Jaws = Smma (Median Price, 13, 8), where Smma represents the Smoothed Moving Average (SMMA).
The alligator's jaw represents the price level that should be established in the market in the absence of fresh influences. It resembles a long-term equivalent of a reasonable market price. Therefore, the author referred to it as the "Line of Balance." If the price is above the "Alligator Jaw," it is thought that the market positively analyses new elements and will continue to move. In contrast, if the price is below the "Alligator Jaw," the market will move new variables negatively and continue to decline.
Teeth of Alligator (red line)
This is the Balance Line for a major time period that is an order of magnitude less than the previous one. The line represents an eight-period moving average shifted five bars into the future on the chart.
Smma = Teeth (Median Price, 8, 5).
Lips of an Alligator (green line)
This is the Balance Line for a major time period, one order below the Line, a 5-period moving average with a 3-bar advance on the chart.
Smma = Alligator Lips (Median Price, 5, 3).
"Teeth" and "Lips" are examined and provide signals in the same manner as "Jaws," but for a shorter time period.
In other words, the Alligator is sensitive to the crossings of moving averages with varying periods. Williams concluded that his indicator enabled the trader to "keep his powder dry" until the ideal moment to launch an attack, much like an alligator that waits for the right moment to pounce before swiftly attacking its prey.
Actual calculations describe the summation of closing prices over the representative periods listed above (13, 8, and 5), which are then shifted between 3 and 8 time periods on the chart.
What signals are provided by the alligator?
The Bill Williams Alligator consists of three acts:
The alligator is fast asleep.
When the three lines are near to one another, this indicates that an all is. Thus, trading should be avoided during these moments of low volatility.
The alligator is awakening.
Typically, this occurs when the alligator's lips (green line) cross its teeth (red line) and jaws (blue line) (blue line). If the lips pass the other two lines in an upward direction, a bullish Alligator is awakened. We get a bearishly awakened alligator if the lips overlap the other lines downward.
The alligator is eating.
This is when we should also be dining - not on hamburgers, but on profits!
After reawakening, the alligator could begin to eat. The signal for a hungry alligator is when a candle closes below or above the three lines following the completion of the awakening phase. This is when we should either go long or short.
To trade forex utilizing the alligator indicator, first, consider the three essential pieces of information it provides. These can be used in your forex trading strategy:
Absence of a market trend - when the green, red, and blue lines are extremely close or interlaced.
When the red and blue moving averages are moving in the same way, the green moving average passes through them, and all three end up moving in the same direction, a trend is forming.
Trend direction - A trend exists only when the three lines move parallel. There is an upward trend if the green line is above the red line and the red line is above the blue line. If the order of the lines is inverted (blue top, red middle, green bottom), the market is in a downtrend. The expansion of the lines verifies the trend.
You can trade foreign exchange with us utilizing derivatives such as spread bets and CFDs. Both are leveraged products, so you can trade on price increases or decreases without owning the underlying assets.
You can also open a position with a margin deposit, which helps reduce the cost of entry while trading. However, margin trading carries additional risk, as you could lose more than your initial amount. You will continue to be exposed to the full amount of the trade, and your profit and loss will also be based on the whole value.
You can open a 'buy' position if you believe the alligator indicator indicates an upswing (go long). This allows you to profit from rising foreign exchange rates. If you believe the indicator is indicating a downward trend, you can open a'sell' position (go short) to profit from declining FX prices. If any of your predictions are incorrect, you will incur a loss.
Regarding the Alligator Indicator, the MACD or Moving Average Convergence Divergence oscillator is an additional indicator that numerous traders employ. This allows traders a "second look" at market momentum alongside the price. This configuration will function similarly to the Moving Average.
The convergence Divergence oscillator normally does, which means there are a few signals you should be aware of when utilizing this in conjunction with the Alligator Indicator.
Important is the MACD crossing above and below the zero line. Several errors are indicated on the chart to offer you an idea of how you may wish to trade the market utilizing the Alligator.
Indicator and MACD in conjunction. Observing the first blue arrow reveals that the oscillator had crossed the zero line and that the oscillator's histogram began to rise in tandem with the Alligator Indicator's moving averages. The subsequent set of arrows is orange because they indicate a decrease in momentum. You now choose to either close the trade or move the stop-loss order closer. Shortly later, the Alligator Indicator begins to reopen its jaws, and the MACD histogram begins to climb, indicating a return to life.
Closer to the top of the chart, an orange arrow can be seen as the Alligator Indicator begins to close its jaw once more. In addition, the oscillator's histogram has begun to decline, signaling that momentum may be beginning to diminish. After that, the red arrow indicates that the alligator's jaw is once again open for consumption, while the MACD histogram begins to drop significantly below zero. This indicates that there is considerable downward pressure.
Combining the Alligator Indicator with Additional Trading Instruments
No trading platform is flawless, and this implies that expert traders are constantly seeking ways to combine numerous indications to strengthen the weak regions. Regarding the Alligator indicator, for instance, some traders may examine a trend indicator that employs a different methodology to determine whether it confirms the signals.
This would help us filter out misleading signals during the sleeping phase of the Alligator technical indicator and may also improve the timing of trading signals.
Alternately, you might use an alternative strategy, such as a Momentum Indicator, to search for price/momentum divergence and verify your trading signal's validity.
Conclusion
Designed by one of the most iconic forex traders, the Williams Alligator is a difficult yet incredibly useful and successful technical analysis indicator. The most crucial aspect of the Bill Williams Alligator is when the three lines are combined. During this time, the Alligator is regarded to be asleep, and there are no trading signals presentștii.știi. You should keep an eye on these instruments, especially if price movement suggests an increase in momentum. The optimal time to join a trend move is immediately before it occurs.
While you may not be able to pinpoint the precise price at which a trend begins, you should aim to enter the market as near to the beginning as feasible. When the Alligator is feeding, keep an eye out for pullbacks in the opposite direction of the main trend and trade these moves using a pullback approach.
You must test it, develop a trading plan, and make risk management your first concern, as with any trading method. Trading on the financial markets is not as simple as many belief.
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