The Alligator indicator made its debut in 1995, devised by a well renowned FX trader by the name of Bill Williams. He wanted to find a simpler way to identify prevailing trends as well as pinpoint trend retracement points. In this article we look at the structure of the Alligator indicator, as well as the ways in which it may be interpreted.
Trading FX With The Alligator Indicator
The Structure Of The Alligator Indicator. So called because it takes the form of open or shut alligators jaws, this indicator is plotted simultaneously along price action and consists of three lines. The alligators Jaw is normally a blue line comprised of a 13 period smooth moving average. Critically, this MA is pushed into the future by eight bars. The teeth of the Alligator Indicator (a red line) is an eight period smoothed moving average shoved by five bars into the future. Finally, the lips of the Alligator Index (a green line) is a 5 period smooth moving average shoved 3 bars into the future.
Interpreting The Alligator Indicator. There are multiple signals given by the Alligator Indicator:
- The 3 Lines Of The FX Alligator Indicator Are Constricted. There is no buy or sell signal as such in this case, and traders need to just be on the ready. The Alligator Indicator jaws are closed shut (ie markets are uncertain), and traders need to bide their time until such time a signal is given.
- The 3 Lines Of The Alligator Indicator Are Apart. When in an FX position, when the 3 lines of the Alligator Indicator are comfortably apart the trader can stay in the trade so long as the price candlesticks are away from the 3 lines. In an FX uptrend, the price candlesticks must be above the 3 lines, while in a downtrend they ought to be below. When the price candlesticks start veering back towards the Alligator Index lines, traders need to be alert to plan their exits.
- When the 3 lines of the Alligator Index constrict or cross, the FX trader should be considering their exit strategy.
- The further apart the 3 lines of the Alligator Indicator are, the more resurgent the trend is believed to be. Keep in mind however, when trends come to an end they may do so abruptly and aggressively – the lines may converge on each other quite quickly so FX traders must never get too comfortable even when the Alligator lines appear to be far apart, and the trend seemingly strong.
Combining The Alligator With Other FX Indicators. Like just about every other FX indicator around, the right way to use the Alligator Indicator is to combine it with the right mix of additional indicators. Since the Alligator Index is plotted alongside price action, it can be confusing to clutter this part of your trading screen with other indicators plotted next to price – such as the moving average or the Bollinger bands. Instead, it can provide for a neater display to plot independently plotted indicators that pick out momentum and sentiment. Some good examples of FX indicators that work well with the Alligator include the Commodity Channel Index (CCI) and the Stochastic. Both are momentum indicators that can provide a good level of insight on oversold and overbought price levels.