The Alligator is a technical analysis tool consisting of three lines overlaid on a pricing chart. The lines represent the jaw, the teeth and the lips of the named animal. The indicator is used to determine the trend and predict its future direction. The Alligator works best when combined with an oscillator-type indicator.
This indicator was introduced by pioneer of market psychology and legendary trader Bill Williams in his 1995 book “New Trading Dimensions”. The main purpose of this indicator is to show the emerging market trends and determine optimal entry points. It can be applied to any time frame and asset.
The Alligator has become a core indicator in the majority of trading platforms. According to Bill Williams himself, the Alligator is a combination of three “balance lines”. Each of them is a variation of the Simple Moving Average, shifted ahead of the current market price.
The logic behind
The Alligator indicator is a combination of three smoothed moving averages with periods of five, eight and 13, which are all Fibonacci numbers. Each of the lines is shifted ahead for a certain period of time, that depends on the short- or long-term orientation of that particular line.
1) The Alligator’s Jaw (red) is a 13-period SMA, moved into the future by 8 bars;
2) The Alligator’s Teeth (orange) is an 8-period SMA, moved into the future by 5 bars;
3) The Alligator’s Lips (yellow) is a 5-period SMA, moved into the future by 3 bars.
Like a real beast
The Alligator indicator is a trend-craving carnivore, which successfully imitates its real-life counterpart. Sideways trends are marked with the alligator’s closed mouth — all the three lines approach each other and occasionally intersect. When the alligator is sleeping, the majority of careful traders avoid making new deals. The longer the Alligator waits, the hungrier it gets. Long periods of sideways trends are interspersed with strong bullish/bearish periods, and the Alligator is good at catching these moments. When the trend takes shape, the beast opens its mouth and the basic lines move farther apart. The stronger the trend, the wider the alligator’s mouth will open. When the beast is sated it returns back to the resting state, the lines become horizontal and focus in a narrow corridor.
Setting up the indicator
In order to use the Alligator indicator in the IQ Option trading platform, click on the “Indicators” button in the lower left corner of the screen. Then choose “Alligator” from the list of possible indicators.
Click the “Apply” button without changing the settings. The Alligator graph will then be overlaid on the price chart.
The are two main tasks this technical analysis instrument is best suited to 1) defining the strength of the existing trend and 2) predicting the beginning of a new one.
Defining trend strength
In the example above a relatively weak bullish trend is followed by a much stronger bearish one. It can be seen that the absolute value of the basic lines’ slope in the first case is less than that of the top-down section of the graph. The distance between the lips and the teeth and between the teeth and the jaw has also significantly increased after the trend had changed its direction.
Predicting a new trend
If the amplitude of the moving average lines starts to increase, the new trend is very likely to be observed soon. In case of a bullish trend formation, the lips should be positioned above the two other lines, and the intersection of the teeth and the jaw should be observed. In the situation of a downward-moving market, the lips line is situated below the other two, while the intersection of the teeth and the jaw should also be present.
Things to consider
The Alligator is a unique trading indicator, appreciated by many professional traders. In order to use it successfully, though, the one has to follow a few simple recommendations.
- Being a combination of moving averages, this indicator may be late with the signals it provides. Keep in mind that the actual trend begins earlier than the indicator shows.
- Professional traders combine the Alligator with other trading indicators for maximum accuracy and predicting potential. Moving average convergence divergence or MACD can be a good choice.
- It can be a good idea to double check the beginning trends on a higher time frame.