What is the Alligator Indicator?
The Alligator indicator is a technical analysis tool developed by celebrated trader and chartist Bill Williams.
He designed this indicator to improve trader success.
The design of the Alligator is based on an assumption that the financial market is non-trending most of the time (80%) and only spends the rest (20%) trending.
This assumption relates to the real-life Alligator who spends most of his time sleeping. And only wakes up to hunt aggressively depending on the time it spent sleeping.
How does it work?
This indicator uses three smoothed moving averages set at period 5, 8, and 13.
It is these standard settings that make it easy to predict when a trend is likely to appear and end.
Here are the components of the alligator indicator as designed by Bill Williams: –
- Alligator’s jaw – plotted on the chart as a blue line on most broker platforms. It is a 13-period SMMA and smoothed by 8 bars forward.
- Alligator’s teeth – drawn as a red line. Represents the 8-period SMMA (Simple Smoothed Moving Average) smoothed 5 bars forward.
- Alligator’s lips – shown as a green line. It is in fact a 5-period SMMA smoothed 3 bars forward.
Understanding the Alligator indicator signals in Olymp Trade.
The longest moving average in this tool is the 13-period line, the Jaw.
It is used to indicate the price levels of the traded asset.
As long as the underlying asset prices remain above the Alligator’s Jaw line, you should expect the prevailing uptrend to continue.
On the flip side, when the asset starts trading below the ‘Jaw,’ it should tell you that the market is on a downtrend.
Bill named the three moving average lines, the Balance Lines.
Whenever you see the lines crossed, assume the Alligator is on a sleeping mode. And the longer it is sleeping, the hungrier it get.
Simply put, when balance lines are closer together, it is a sign of absence of a trend in the market.
When the Alligator is awoken, it will start hunting aggressively (forming newer trends) until it is full again and then goes back to sleep.
In a layman’s language;
When the balance lines start moving apart, it is a sign that the market is developing a trend. This trend gets stronger when the lines move further apart.
As the trend nears exhaustion, the three moving averages start moving closer together and eventually converge into narrow bands.
When that happens, it means the market trend is over.
And that, is how to read the Alligator’s signals.
We can now look at some of the best trading strategies on Olymp Trade based on Alligator indicator.
But before that, you must first add the indicator to your chart.
To do this, follow the steps below:
Setting up Alligator indicator on Olymp Trade.
- You need to be logged in to your Olymp Trade account to add this indicator to your chart.
- If you don’t have an account, register here.
- Now locate the indicators feature on the platform and click on it.
- You will see a window pop up with all indicators.
- Scroll to find the alligator indicator on the list and click on it once to activate.
- Leave the indicator’s setting at default.
How to place trades on Olymp Trade using the Alligator indicator.
We have so far seen that the Alligator goes through three phases:
- Sleeping – depicting absence of trend in the market.
- Awakening – new trend gaining momentum.
- Sated – trend losing momentum.
When it comes to generating trading signals on Olymp Trade, most traders use the convergence and divergence of the three moving averages.
And remember the Jaws are slower while the Lips are faster.
As a result, when the lips cross down the other who lines, that is an indication of a short selling opportunity.
Conversely, when the lips cross upwards, it is a sign of buying opportunity.
Take note of this:
Bill Williams explained that downward crossing is compared to when the alligator is ‘sleeping.’
On the other hand, upward crossing is likened to when the alligator is awakening. This is the period when the market is building momentum.
That is why it make more sense to enter a long position.
And in the end you will notice that the distance between the three lines continually increases, denoting trending periods.
Actually, this is what Williams referred to as the alligator ‘eating with the mouth wide open.’
The indicator lines narrowing denote that the trend is losing momentum.
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