Alligator and Fractals, two of the most popular technical analysis indicators, can be used together to form an interesting trading system. Used together, they have the potential to provide strong and accurate forecasts. The indicators can be applied to any asset and on any time frame.
Alligator is a technical analysis tool consisting of three lines overlaid on the price chart. The lines represent the jaw, the teeth and the lips of the named animal. It is used to determine the trend and predict its future direction. Fractals, in turn, are recurring patterns that can predict reversals among larger, more chaotic price movements. Two indicators can complement each other perfectly.
How do they work?
Alligator is a combination of three smoothed moving averages with periods of 5, 8 and 13, which are all Fibonacci numbers. Each line is shifted ahead for a specific 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.
The following analogy is used to describe the way the indicator works. Sideways trends are marked with the alligator’s closed mouth — all three lines approach each other and occasionally intersect. This is when the alligator is asleep, and the majority of careful traders avoid making new deals. The longer the alligator is waiting, the hungrier it gets. Long periods of sideways trends are interspersed with strong bullish/bearish periods, and this indicator is perfectly suited to catch these moments.
Fractals are used to identify emerging trends and warn the traders of upcoming investing opportunities. Fractals come in two different forms:
1) A bearish turning point occurs when there is a pattern with the highest high in the middle and two lower highs on each side.
2) A bullish turning point occurs when there is a pattern with the lowest low in the middle and two higher lows on each side.
Setting up the indicators in the IQ Option trading platform is easy.
To activate Alligator, click on the “Indicators” button in the bottom left corner of the screen and go to the “Popular” tab. Then choose “Alligator” from the list of available tools.
Click the “Apply” button without changing the settings. The Alligator graph will then be overlaid on the price chart.
To activate Fractals , click on the “Indicators” button in the bottom left corner of the screen and go to the “Popular” tab. Then choose “Fractals” from the list.
Click the “Apply” button without changing the settings. Fractals will then be overlaid on the price chart.
How to apply in trading?
Though each indicator can be used separately, Fractals and Alligator, as noticed by Bill Williams himself, work best when used simultaneously and confirm each other’s signals. Generally, all buy signals provided by Fractals can be considered valid if only below the Alligator’s central line (orange). Similarly, all sell signals should be above the Alligator’s central line (orange) in order to be valid.
Things to consider
- Being trend following indicators, Alligator and Fractals are lagging behind the actual market.
- It is possible to boost the accuracy of both indicators by increasing the period. The number of generated signals will, however, decrease.
- Signals should be checked on different time frames for maximum predictive potential.
- The Alligator and the Fractals work best when used simultaneously. Using only one of the above signals can be risky.
- No indicator or trading system can provide accurate signals 100% of the time.