Learn about the Alligator technical tool, created by Bill Williams, which follows the premise that markets trend only 15-30% of the time. The Alligator indicator can be used to confirm ongoing trends, identify counter-trend moves and is made up of three moving averages known as the jaws, teeth, and lips. The absence of a trend, the formation of a trend, and the direction of a trend can be identified using the Alligator indicator, and traders should look for the perfect order of the three moving averages to signal a strong trend. The Alligator can also be used to analyze crossovers and identify support and resistance levels.

The Alligator Indicator: A Guide for Traders

Introduction to the Alligator Indicator
The Bill Williams’ Alligator Indicator Explained
Using the Alligator Indicator to Confirm Trends
What is the Alligator Indicator?
Concepts Behind the Alligator Indicator
Breaking Down the Alligator into Three Moving Averages
How to Use the Alligator Indicator in Trading
Understanding the Absence of a Trend
Spotting the Formation of a Trend
Monitoring the Direction of the Trend
Reading Opening Signals of the Alligator Indicator
How to Trade with the Alligator Indicator
The Perfect Order Strategy
Using Dynamic Support and Resistance Levels
Analyzing Crossovers with the Alligator Indicator
Golden and Death Crosses with the Alligator Indicator

Introduction to the Alligator Indicator

If you are a trader who uses moving averages as a tool for trading purposes, the Alligator Indicator is an interesting strategy to add to your trading technique. This trading indicator was created by well-known trader Bill Williams, and it is mainly used to confirm ongoing trends and their primary direction, much like moving averages. It can also be used to enter counter-trend moves, which is another plus point for traders.

In the following article, we will specifically discuss the Alligator Indicator and its concepts. We will also explain how to use this indicator while trading.

The Bill Williams’ Alligator Indicator Explained

The Alligator Indicator is a trend-following tool based on the idea that financial markets and individual stocks trend just 15% to 30% of the time, while 70% to 85% of the time, they grind through sideways ranges. The indicator’s name comes from the head of an alligator, and it consists of three balance lines, each smoothed over different time-frames. These three lines are the Jaw, the Teeth, and the Lips of an alligator, which opens and closes in response to evolving trends and trading ranges.

Bill Williams believed that a successful trader would know the structure of the market. Keeping with this line of thinking, the Alligator Indicator consists of three moving averages, each smoothed over different time-frames. By looking at the behavior of the balance lines, we can determine the structure of the market.

Using the Alligator Indicator to Confirm Trends

The Alligator Indicator’s three smoothed moving averages are set at 5, 8, and 13 periods, which are all Fibonacci numbers. The green moving average represents the Lips of the Alligator and is set to 5 and displaced 3 periods into the future. The red moving average is the Alligator Teeth and is set to 8 periods and is displaced 5 periods into the future. Finally, the blue moving average represents the Jaws of the Alligator and is set to 13 periods and displaced 8 periods into the future.

What is the Alligator Indicator?

The Alligator Indicator is a trading tool that is effective in identifying the presence and absence of trends in the market. It is based on the premise that markets spend more time in consolidation or sideways price action, and only 15% to 30% of the time in trending conditions. The indicator’s name is derived from its similarity to an alligator, where the three moving averages represent the alligator’s Jaw, Teeth, and Lips.

Concepts Behind the Alligator Indicator

The Alligator Indicator consists of three moving averages, with each line having a name related to an alligator’s mouth. The Green line represents the Lips, the Red line represents the Teeth, and the Blue line represents the Jaws. The indicator was designed to help describe some of the behaviors of the market as it goes from a non-trending to a trending state. The idea behind it is that the absence of a trend in the market is like a sleeping alligator. Eventually, the alligator wakes up, and the longer it slept, the hungrier it will be – in other words, the more significant the trend will be.

Breaking Down the Alligator into Three Moving Averages

The three moving averages comprising the Alligator Indicator reveal different aspects of the market. The green line represents the fastest-moving average and is called the Lips. The Red line represents the Teeth, while the Blue line represents the Jaws. The Jaw is the slowest of the three lines and reacts the most slowly to changes in the market.

How to Use the Alligator Indicator in Trading

There are three critical pieces of information that the Alligator Indicator shows: the absence of a trend, the formation of a trend, and the direction of the trend. Each of these pieces of information helps traders understand market conditions and identify profitable trading opportunities.

Understanding the Absence of a Trend

The absence of a trend in the market is a common state, as indicated by times when the three lines of the Alligator Indicator are close together or intersected. This means that the Alligator is dormant, and the market is not really doing anything. This is generally a time of low volatility, and traders may want to find another instrument to trade.

Spotting the Formation of a Trend

A successful awakening of the Alligator occurs when the fast green line crosses through the slower lines, and all three lines spread apart. This move indicates the formation of a trend. These persistent trends are when the Alligator Indicator tends to be most effective.

Monitoring the Direction of the Trend

The direction of the trend is indicated by the movement of the balance lines. The green line, the fastest-moving average, can be used to monitor the initial stages of a new trend, followed by the red line and the blue line. If the balance lines move downward and widen after a sell signal, it confirms a downtrend.

Reading Opening Signals of the Alligator Indicator

One of the drawbacks of the Alligator Indicator is the difficulty of successfully reading the opening signals in a timely manner. During sleeping periods or the absence of a trend, the Alligator Indicator may produce crossover signals that look like trading signals but turn out to be false moves. In a trending market, the indicator is more effective, especially when the lines are moving away from each other.

How to Trade with the Alligator Indicator

Traders can use the Alligator Indicator in a variety of ways. The most classical way to use it is by looking for the “perfect order.” The three moving averages should not cross, forming the perfect order, which signals a strong trend. Another approach is to use dynamic support and resistance levels. These levels move along with the price and offer more value than horizontal levels.

The Perfect Order Strategy

The perfect order strategy involves waiting for the Alligator’s balance lines to be in perfect order, with the Green line at the top, the Red line in the middle, and the Blue line at the bottom. When the lines crossover, this signals a strong trend. However, traders need to be cautious as waiting for the perfect order can result in missed trading opportunities.

Using Dynamic Support and Resistance Levels

Traders can use the Alligator Indicator to identify dynamic support and resistance levels. These levels move along with the price action and offer more value than horizontal levels. As a result, traders can use this information to identify profitable trades.

Analyzing Crossovers with the Alligator Indicator

Traders can use crossovers with the Alligator Indicator to identify trends and false signals. By analyzing the crossover between the moving averages, traders can distinguish between real and fake crossovers.

Golden and Death Crosses with the Alligator Indicator

The concept of the Golden and Death cross is often used in trading to indicate the trend’s bullish or bearish direction, respectively. The Alligator Indicator can be used to identify Golden and Death crosses, making it an essential tool for traders.

Conclusion

The Alligator Indicator is an important tool for traders who want to confirm market trends and identify profitable trading opportunities. It consists of three balance lines that represent the Jaw, Teeth, and Lips of an alligator. By using this indicator to monitor the balance lines’ behavior, traders can determine the structure of the market and enter profitable trades. Whether you decide to use the perfect order or the dynamic support and resistance approach, the Alligator Indicator can be used to refine your trading strategies and improve your trading performance.

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