Understanding how to trade with alligator indicator: You might often come across the term “The trend is your friend” while trading in the stock market. It means that traders should trade in the direction of the trend the stock is moving. But, identifying trending markets to trade and identifying consolidating markets to avoid is easier said than done. Such was the issue faced by a renowned trader Bill Williams which led him to create the Alligator indicator.
In this article, we will get an overview of the alligator Indicator and understand how to trade with alligator indicator.
What Is A Williams Alligator Indicator?
The Williams alligator indicator also referred to as the Williams indicator or alligator indicator is a technical tool that comprises three moving averages that reflect the behaviour of the trends in the market. Traders use this indicator to identify the uptrends, downtrends, and sideways range in the market.
This indicator was created by Bill Williams and published in his book ‘Trading Chaos: Applying Expert Techniques to Maximize Your Profits’ in the year 1995.
Also Read: Most Used Intraday Trading Indicators: Used in Technical Analysis
Composition Of The Alligator Indicator
The alligator indicator comprises three moving averages each of which derives its name from the alligator’s body parts, according to each of their weights and strength.
Source: Tradingview
The green line in this indicator represents the lips of the alligator. It is the weakest among the three moving averages and reacts quickly to changes in the price of the security. This line is a 5-period smoothed moving average which is shifted 3 bars into the future.
The red line in this indicator represents the teeth of the alligator. This line has an average level of strength to it and reacts moderately to changes in the price of the security. This line is used by traders to enter trades with moderately strong trends. This is an 8-period smoothed moving average which is shifted 5 bars into the future.
The blue line represents the jaws of the alligator and is the strongest among the three moving averages. This line is used by traders to enter trades with slow trends or trades with strong support/resistance zones. This line is 13 period smoothed moving average which is shifted 8 bars into the future.
Indications By The Alligator Indicator
When using this indicator, traders can make use of these three pieces of information to determine the trends in the market.
Sleeping Alligator:
When all three moving averages in the indicator move close to each other or intercept each other, it is assumed that the market is lacking a trend.
Source: Tradingview
Awakening Alligator:
Here, the red and blue moving averages move in the same direction. Once the green moving average passes through the two moving averages and also starts moving in the same direction, it is an indication that a trend is about to formulate.
Source: Tradingview
Hungry Alligator:
When the red line is moving above the blue line and the green line is moving above the red line, it is an indication of an uptrend in the market.
Similarly, when the red line is moving below the blue line and the green line is moving below the red line, it is indicating a downtrend in the market.
The strength of the trend is determined by how the jaw of the indicator is from the lips. The greater the distance between the jaw and the lips, the greater the trend is assumed to be.
Source: Tradingview
Source: Tradingview
How To Trade With Alligator Indicator
Here is how you trade taking a long position and Short Positions using the alligator indicator:
For Long Positions:
When the green line appears on the top and the blue line appears on the bottom of the indicator, it is a signal of a bullish trend in the market. Here, you can enter a long position when the price of the security starts trading above all the lines of the indicator.
There is no fixed level for profit target in this strategy. Here, one can exit the trade when the green line moves below the red line as it can signify the end of the uptrend.
The stop loss in this strategy should be a few points below the point where you entered the long position and this can be set based on your risk appetite.
Source: Tradingview
For Short Positions:
When the blue line appears on the top and the green line appears on the bottom of the indicator, it is a signal of a bearish trend in the market. Here, you can enter a short position when the price of the security starts trading below all the lines of the indicator.
The profit target in this strategy should be the point where the green line moves above the red line as it can signify the end of the downtrend.
The stop loss in this strategy should be a few points above the point where you entered the short position and this can be set based on your risk appetite.
Source: Tradingview
Also Read:
In Closing
In this article, we discussed what is an Alligator Indicator and how to trade with alligator indicator.
The alligator indicator can a be very useful tool to identify the trends in the market and execute trades based on it. But, traders should also use price action along with this indicator to confirm their trading decisions and improve their overall trading performance.
FAQs
1. What is the best time frame for alligator indicator?
The best time frame for the Alligator indicator depends on the trader’s strategy and preference, but commonly used time frames are 15 minutes to 1 hour for short-term trading and 4 hours daily for longer-term trading.
2. What are the best settings for alligator indicator?
The best settings for the Alligator indicator are typically the default settings of 13, 8, and 5 for the Jaw, Teeth, and Lips respectively. However, traders may adjust these values based on their specific trading style and market conditions.
3. What is the best use of Alligator indicator?
The Alligator indicator is best used to identify trending markets, confirm market entry or exit points, and provide a visual representation of market volatility. It helps traders understand the direction and strength of a trend.
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