Let me introduce you to this powerful trading strategy.
A strategy that I have tested and proved to deliver accurate results; up to 81% of the time.
What am I talking about? The trending trading strategy.
Today’s trading strategy involves marrying the MACD indicator, RSI, and the Alligator to pick trading signals. Reading to the end should be worth your while.
But before we do that, allow me to make a brief introduction to these indicators.
Of course, if you feel like you have mastered how these trading tools work, by all means, jump right to the point where I reveal the trending system strategy that’s the purpose of this post.
Otherwise, I recommend reading along.
Understanding the Alligator indicator.
In brief, the Alligator indicator is a trend-following indicator developed by Bill Williams.
Basically, the indicator works under the assumption that almost 80% of the time, the financial market is in a ranging mode and only trends 20% of the time.
As such, William believed that most traders make much of their money during the trending period.
Now, to help traders squeeze as much profit from a trend, the Alligator uses three smoothed moving averages.
From how these three lines interact on a chart, the name Alligator came about.
In fact, the interactions of the three lines can be likened to the behavior of the real-life alligator.
With that said, the three moving averages make up the jaw, teeth, and lips of the Alligator.
- In Olymp Trade the jaw is the blue line.
- The teeth is plotted as the red line.
- Lips come out as the green line.
Now, the convergence and divergence of these three lines is what you should pay attention to. The jaw is considered the slowest MA and the lips make up the fastest moving average.
A short SELL signal come about when the fast line crosses down the other two lines.
On the flip side, the upward crossover (when the fast line crosses up the other two lines) gives you the buy signal.
Trends in such periods show that the alligator is in awakening mode.
Once the alligator is awake, it doesn’t just sit there, it starts hunting for food.
This is seen on the chart when the three moving averages are diverging either – highly or lowly signaling imminent trends.
As the alligator goes around trending (feeding), it reaches a point it just can’t go on anymore. This is the ‘sated’ state.
It denotes that the prevailing trend might be coming to an end. Therefore, you should prepare to take profit and exit the trade.
To make sure that these signals are legit, use the MACD and the RSI indicators to confirm alligator signals.
How will the MACD indicator help?
Moving Average Convergence Divergence (MACD) is a momentum indicator showing you whether the trend is bullish or bearish.
To do this, the MACD brings together two moving averages with different spend levels: the fastest moving average and the slowest moving average. Additionally, it has bars (histogram) used to measure the difference between the two moving averages.
In fact, on a MACD chart, you will see three numbers representing its parameters.
- The first one represents the faster-moving average.
- The second one represents the slower MA.
- While the third number shows the number of bars representing the difference between the two averages
Now, when the faster moving average crosses under the slow MA, it is a signal of a downtrend.
Conversely, when the fast line crosses above the slow line, that’s an uptrend signal.
Depending on the distance between the two MAs, the trend could either be strong or weak.
Using the MACD to confirm the Alligator’s buy or sell signals.
You now know how the MACD works to generate trading signals. If you aren’t sure how MACD works, or just want to learn more about the indicator, take some time off to read more about it here.
Confirming Alligator Indicator Buy Signals on Olymp Trade.
As we mentioned earlier, the Alligator indicator gives buy signals when the beast is in awakening mode.
This is what I mean:
When the faster-moving average crosses up the other two lines (upward crossing), it is an indication of the trend gathering momentum. As such, you should enter a long buy position.
But not so fast.
To make sure this isn’t another false signal, look at the MACD signal line and note its position.
As a confirmation to your buy signal, the MACD should be showing the fast-moving average crossing above the slow moving average.
In addition, the histogram bars should be depicting a widening gap between the two moving average lines.
How about the Alligator indicator sell signal?
Confirming the Alligator indicator sell signal on Olymp Trade.
It follows suit as well.
- The jawline crosses other alligator lines top down. Go short.
- This signal is confirmed by the MACD showing the fast line crossing under the slow line.
- And the distance between the two lines is increasing as depicted by the histogram to denote a strong downtrend.
And now you are wondering where the RSI will fit in.
Well, as it turns out, you can still add another layer of trend identification indicator to seal the Alligator indicator trading signals on Olymp Trade.
How? By adding the RSI indicator to your chart.
Where does the RSI indicator fit in between the two?
Relative Strength Index (RSI) tells you whether an asset is overbought or oversold using a scale of 0 and 100.
When the RSI is above the 70 level, that is a signal of an overvalued asset, and you should expect a reversal.
On the flip side, values below 30 denote the asset is oversold (undervalued) and an uptrend is looming.
50 line is the centerline. When the RSI is moving above it, that’s a bullish signal and when moving below it gives a bearish signal.
With that in mind, let’s look at how you can layer in these signals to increase your chances of getting it right:
- Once the Alligator sends a buy signal, and the MACD confirms it, the RSI should be showing that the asset is above the 50 line. Meaning it is in a bullish trend. Ride the trend until it nears the 70 line.
- On the other hand, enter the sell position when the RSI signal line goes past the 50 line downwards; Alligator sends a buy signal, and the MACD confirms it.
Now that you know how to leverage the trending system, let me show you in brief how to add the three indicators to your trading chart on Olymp Trade.
Setting up the three indicators on Olymp Trade.
- Make sure you are logged in to your trading account. If you do not have one yet, open a FREE Olymp Trade account here.
- Choose the asset you’d love to trade and select a preferred chart type.
- Locate the indicator tab and select Alligator, MACD, and RSI one at a time.
As for the indicators parameters, here are my recommendations:
- Alligator set at 25, 5, 2.
- MACD set at 12, 26, 9.
- RSI set at 70 for Overbought and 30 for oversold.
- Recommended trading time frame is a 1-hour chart set to Japanese candlesticks.
Try out this trading strategy on the Olymp Trade demo account and see how it goes. Once you’ve mastered it, make a deposit and start raking real profits.
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