If you are an intermediate or an advanced trader then chances are, you’ve heard of the term bulls and bears in trading.
In other instances, you’ve also come across wolves used to refer to certain market behaviors.
But bulls, bears and wolves aren’t the only
Anthropomorphized animals in the markets; there are more. The Alligator is just but another.
Today I will introduce you to the alligator, not as an amphibious we all know, but as an indicator which you can use in trading to pick trends and to find optimal entry points into the market.
I hope that when you are done reading this post you will create a demo account to practice what you have learned today.
Let’s dive right in, shall we?
What is the Alligator indicator?
Alligator was developed by Bill Williams, pioneer of the market psychology. It is a trend-following indicator based on the idea that the financial market spends most of its time in ‘sleeping’ mode (70 to 80%) and the remaining 15-30% trending.
This can be compared to the real-life alligator.
Based on its behavior, we can describe accurately the market as it goes from non-trending (sleeping mode) to trending.
When the alligator is sleeping, it can be compared to the absence of trends in the market, better yet, during periods of sideways action.
The thing is, the alligator won’t sleep forever. Eventually, it will wake up and sets off to hunt prey.
And its hunting aggressiveness will depend on how long it spent sleeping.
In other words, the longer the alligator sleeps, the hungrier it gets.
As such, the more time the market spends ranging, the stronger the trend will be.
Bill Williams insisted that as a trader, you should be aware of the prevailing market structure. And with that in mind, the Alligator indicator is made up of three moving averages, each set and smoothed over a distinct time. He called them the ‘balance lines’.
More importantly, by studying how these balance lines are behaving, you can easily determine the prevailing market structure. In other words, you can tell if you are dealing with a sleeping alligator or not.
How does the Alligator Indicator work on Expert Option?
As we mentioned above, the Alligator is comprised of three moving averages set at periods five, eight, and 13.
When you look at these Alligator periods, what do you see?
If you answered Fibonacci numbers, you are right.
The three moving averages are Fibonacci numbers. Additionally, the first smoothed average is commonly calculated with an SMA. This way, there are additional smoothed averages to help slow down the indicator turns.
The three moving averages are what make up the alligator’s mouth: the Jaw, Teeth, and the Lips. They open and close as a reaction to developing trends and trading actions:
- Alligator’s Jaw – it is marked red on the Expert Option chart, and between the three moving averages, this is the slowest. It is set at 13-period and smoothed (shifted forward) by eight bars.
- Alligator’s Teeth – colored green, set at 8-period, and smoothed by five bars forward.
- Alligator’s Lips – plotted as a yellow line and calculated as 5-period MA that is smoothed by three bars on the following values.
The complex ins and outs of solving the moving averages shouldn’t bother you because the Expert Option platform will take care of the calculations for you.
Having mentioned that, let’s go ahead and add the alligator to the chart on Expert Option
How to set up the Alligator indicator on Expert Option.
- Log in to your Expert Option trading account and look for Indicators icon located at the top-right corner on your screen. Click on it.
- From the list of Expert Option indicators, click on Alligator.
- You will be presented with this indicator’s settings window. Here is where you can make adjustments to the alligator’s Jaw, Teeth, and Lips in this order – 13, 8, 5 for the periods.
- Leave it as it and finish by clicking the Apply button.
That is how to add the alligator indicator to your Expert Option chart.
How to use the Alligator indicator to trade on Expert Option.
The alligator’s strategies on Expert Option can be categorized into three groups:
- the absence of a trend
- formation of a trend
- And direction or a trend.
Let’s dive deep into how you can use the alligator to predict these trend behaviors in Expert Option.
Using the Alligator to show the absence of a trend.
This is a very common use of the alligator indicator.
The absence of a trend is determined when the three lines of the alligator are moving closer together or sometimes even entwined.
Simply, when you see the red, the green, and the yellow lines all sticking together, it is a sign that the market is dormant. In other words, the market is doing nothing and as such, you should wait for a clear state to occur before you go trading.
Otherwise you may lose your investment.
How does the alligator predict the formation of a trend?
A trend is formed when the alligator is awoken successfully.
Here, you will see the fast yellow line crossing over the slower lines. The latter continues following the trend and at the same time, all three lines start diverging.
When the Jaw, Teeth, and the lips are moving wide apart, it is safe to say that the alligator is no longer dormant but awake and is busy hunting.
Remember, the longer it was dormant, the hungrier it is, and the longer it can sustain hunting mode.
Also note, these are persistent market periods. And the alligator indicator tends to be very effective during such times.
How to determine a change in the direction of the trend using the alligator.
The movements of the balance lines indicate the direction of the market.
Since the yellow line (alligator’s jaws) are the fastest of the three, we expect it to move faster, followed closely by the green line (alligator’s teeth), and trailed by the red line (alligator’s jaw).
When the yellow line crosses above the other two lines, take this to be a buy signal.
On the flip side, if it crosses below the slower lines, it is a sell signal.
If all the three lines are moving higher and wider apart, it is a confirmation of a strong uptrend. On the other hand, the downtrend is confirmed when the balance lines move downwards and apart.
Now, anything going up must come down, and so does any trend.
When you see the balance lines drawing back together and the green line crossing back over the slower lines, it is an indication that the trend is losing steam, and the alligator is sated. And you should exit the trade and take your profit.
Final thoughts on the Alligator strategies on Expert Option
The information provided does not constitute a recommendation to carry out transactions. When using this information, you are solely responsible for your decisions and assume all risks associated with the financial result of such transactions.