The use of Alligator is based on the premise that any financial market is trending 15% to 30% of the time and for the remaining 70% to 85% it is demonstrating sideways movements. The Alligator indicator is good at pointing to the periods of high market volatility and can, therefore, help you determine optimal entry and exit points.
What is Alligator
Basically, the Alligator is a combination of three moving average lines with different periods, often called the jaw, the teeth and the lips. Each of them is shifted ahead for a certain period of time, so that all three align perfectly with each other. When working with IQ Option, here is how the standard setup will look:
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.
Here is how to read this indicator. During the flat market, all three lines are close together. When the trend becomes obvious, the lines drift apart. The trend is essential no matter what asset and on what time frame you are trading. The Alligator, therefore, can help determine optimal entry and exit points by revealing the strength of the current trend.
How to set up
Setting up the indicator is easy:
- Click on the ‘Indicators’ button in the left bottom corner of the trade room and go to the ‘Popular’ tab.
- Choose Alligator from the list of available options.
- Click ‘Apply’ without changing the settings.
The indicator is ready to use. You can play with the setting, increasing/decreasing the time period and the shift for higher accuracy (alternatively, to lower the number of false alarms). For those of you just strating their trading journey it may be wise to use it with default paramters.
How to use in trading
There are several ways to put the Alligator into action. As you probably already know, it can help you determine the strength of the prevailing trend. In trading, not only the direction of the trend matters. Its strength can be just as important, especially on shorter time intervals. When the distance between the jaw, the teeth and the lips of the Alligator increases, the trend is becoming stronger. And vice versa. When the lines come in touch with each other, the trend is most certainly dying out.
This is not the only way to apply the Alligator to trading, as the indicator can pinpoint trend reversal points. For an upward trend, the lips will be situated above the two other lines, while the intersection of the teeth and the jaw lines should be observed. For a downward trend, the lips will be found below the two other lines. The intersection of the teeth and the jaw should also be present.
For better results the Alligator can be combined with any oscillator-type indicator (Awesome, Stochastic etc.). Note that no matter how good an indicator is, it cannot predict the future with 100% accuracy, and Alligator is not an exception.
Conclusion
The Alligator is easy to try but hard to master. Don’t let the seeming simplicity of the tool fool you. Also keep in mind that all indicators, no matter how well-adjusted and used, can return false results. Always keep that in mind and check the signals received on different timeframes and from different indicators.
