Alligator

Definition:

The Alligator Indicator was initially developed by psychologist and technical trader Bill Williams which he wrote about in his New Trading Dimensions book. This sophisticated indicator uses a combination of Smoothed Moving Averages or SMMAs parameterized using fractal geometry and non-linear dynamics.

The Alligator Indicator finds its most common usage in identify trending and ranging markets. In terms of its interpretation, an analogy to an alligator is often used, thereby giving it its name. The indicator itself consists of three lines, typically colored Blue, Red and Green, which are usually named as follows:

• Alligator’s Jaw: This blue line is the primary Balance Line and consists of a SMMA that pertains to the time period used in the indicator’s construction. It typically consists of a 13-period SMMA, moved forward 8 bars.
• Alligator’s Teeth: This red line is the Balance Line for the time period one level shorter. It typically consists of an 8-period SMMA, moved forward 5 bars.
• Alligator’s Lips: This green line is the Balance Line for the time period two levels shorter. It typically consists of a 5-period SMMA, moved forward 3 bars.

The above parts of the Alligator Indicator graphically demonstrate the ongoing interplay of different time frames as they operate in the market.

Furthermore, Bill Williams estimated that trends only occur between 15 to 30% of the time, and yet following them can make traders the most money. Accordingly, Williams used the Alligator Indicator to recognize times when it would be advantageous to follow the trend. He was also able to use it to identify ranging or non-trending markets when it made sense to refrain from trading.

Sample Chart:

Usage:

When traders use the Alligator Indicator to identify trending and ranging markets, an alligator analogy is commonly employed for illustration purposes. Basically, when all of the mythological alligator’s parts or Balance Lines converge and are plotted close to one another, that means the alligator is sleeping or nearly asleep and his mouth is closed. This signals that a ranging market prevails.

Nevertheless, the more the creature sleeps, the hungrier it gets, and the first thing it does upon waking is yawn. Then it smells a bull or a bear, and starts to hunt its prey as the indicator’s Balance Lines begin to separate and his mouth opens.

An uptrend is indicated if the price trades above the alligator’s mouth which consists of its jaw, teeth and lips - the blue, red and green lines respectively. These lines should also be aligned, inclining upwards, with the green over the red over the blue, and all under the price.

Conversely, a downtrend is indicated when the price trades below the alligator’s mouth. In this case, the lines should also be aligned, but heading downwards, with the blue line above the red, which is above the green, and all come in over the price.

Once the alligator has killed and eaten sufficiently, it begins to lose interest and fall asleep again, prompting the blue, red and green Balance Lines to converge and cross over as its mouth closes. This indicates the time to take profits has arrived and the trend is over.

Calculation Method:

Using:

• n = The number of time periods.
• High(n) = The high price traded during time period n.
• Low(n) = The low price traded during time period n.
• SMMA(A,B,C) = a Smoothed Moving Average where A refers to the data being smoothed, B refers to the period to be smoothed, and C represents the time period shift.

Calculate:

• Median Price(n) = [High(n) + Low(n)] / 2
• Alligator’s Jaw (Blue Line) = SMMA (Median Price(n), 13, 8)
• Alligator’s Teeth (Red Line) = SMMA (Median Price(n), 8, 5)
• Alligator’s Lips (Green Line) = SMMA (Median Price(n), 5, 3)

Practice Alligator Trading

Technical analysis with Alligator is a demanding skill that requires practice to master. We recommend that you use a demo account to train yourself for free before applying your skills to real money trading.
Most reputale trading platforms today (for example: GFC Trader, AVA Trader, Meta Trader) feature technical indicator functions which can be applied on real-time charts. You can open a free account, download the trading software and start sharpening your technical analysis skills today!

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