The Alligator indicator is the most interesting of all trend indicators. It was introduced by famous and successful trader Bill Williams, the author of the Chaos Theory. His indicator is strange not only because of its name but because it has all animal qualities: it can “sleep” or “open its mouth” if hungry. These two indicator properties have the practical meaning – they are the trading signals not to trade (when an alligator is sleeping) or to trade in the direction of the open mouth.
Let’s try to understand it. The first fact you should know is that the indicator is based on 3 moving averages with different period displaced to some bars. The indicator standard settings will be as follows:
1) The Alligator’s Jaw is the 13-period smoothed moving average (SMMA) built on the bar average value (a sum of maximum and minimum prices divided into two) and moved into the future by 8 bars;
2) The Alligator’s Teeth is the 8-period SMMA built on a median price and moved into the future by 5 bars;
3) The Alligator’s Lips is the 5-period smoothed moving average (SMMA) moved into the future by 3 bars.
Here is an example of the Alligator settings when installing:
Alligator indicator will look on the chart as follows:
This indicator was created to exclude false signals if no trend. The moving averages can give many false signals during the flat. And as the Alligator author expected the modified averages moved into the future let you start or stop trading on time. To understand how to do it we should study the sleeping and waking cycles of the alligator.
The main signal to buy calls or puts is “opening the mouth” – the moment when the averages begin to separate to different sides and stop crossing. A direction of opening a deal is determined in accordance with the averages direction: if they move upward it is a signal to trade online, if they move downward it is a signal to buy puts. A signal of closing your deal will be “shutting the mouth” – the moment when the moving averages start closing and crossing. You can see the example on the chart:
At first it may seem difficult, but if we remember the method of working with three averages we will see the same situation – the fast average crosses the slower one and gives a signal to trade. If the price chart is above the indicator we trade online and in a reverse situation when the chart is below the indicator we can buy puts.
To understand how the indicator works we recommend you to install it on your chart and test its signals on the quotes history. Such training let you get used to a currency pair and understand its signals. You can also watch trading signals on a real time chart.
Online trading at small intervals allows you to understand how the indicator works on a definite currency. And when you understand how to open deals you will start to earn. But always remember: no trading while the alligator is sleeping.