The Alligator Indicator by Bill Williams: Use Your Imagination

What Williams Alligator Stands For

The Alligator indicator is a trend indicator that consists of three lines: smoothed moving averages. Bill Williams called these moving averages balance lines. Each of them depicts a part of the Alligator's mouth: 

Caption:

1. Alligator's Jaw (blue line) is the slowest moving average. It's a 13-period moving average, which is moved 8 bars forward.
2. Alligator's Teeth (red line) is the intermediate 8-period moving average, which is moved 5 bars into the future.
3. Alligator's Lips (green line) is the fastest moving average among the three. It's the 5-period moving average, which is shifted 3 bars ahead.

Why the Alligator Indicator Matters

Alligator isn't the only indicator created by Bill Williams. Nonetheless, it's famous among forex traders all around the world. The popularity is based on simplicity and accessibility. You'll find the indicator on any trading platform.

Also, you don't need to change any settings. If you're familiar with other indicators, you know that most of them require changing the settings regarding the timeframe you trade. It's not the case with the Alligator indicator. Moreover, it's easy to remember the signals it provides. Just associate the indicator with an actual alligator and imagine its life stages.

How the Alligator Pattern Works

Let's see how the indicator works and what signals it gives. 

Basic Calculations

Even though you don't need to calculate the indicator yourself, it's worth knowing what the rules of the lines' building are. As we said above, the indicator has three smoothed moving averages of 5-, 8- and 13-periods.

The formula is simple:

• Median price = (HIGH + LOW) / 2
• Alligator's jaw = SMMA (Median price, 13, 8)
• Alligator's teeth = SMMA (Median price, 8, 5)
• Alligator's lips = SMMA (Median price, 5, 3)

Where:

• HIGH is the highest price of the bar
• LOW is the lowest price of the bar
• SMMA (1, 2, 3) is a smoothed moving average. A is the median price, B is the moving average period and C is the move to the future. 

Let's Read the Alligator Indicator Signals

The Alligator is always implemented into any trading platform because of its simplicity. It's one of a few indicators that even a beginner can use.

Bill William created the analogy with the Alligator to describe the behaviour of the market according to the phases of the Alligator's daily routine. For example, the time of the trend absence or sideways moves relates to the Alligator's sleeping. Afterwards, the Alligator wakes up and looks for its prey. It's a trend period. The trend strength depends on the length of the sideways trading as the Alligator's hunger depends on when it was sleeping.

Traders use this indicator to determine the lack of a trend, the period of the trend formation and its direction.

Lack of the Trend

It's the time when our Alligator is sleeping, so its jaw, teeth and lips are serried. As a result, all of Bill Williams's 3 lines are either too close to each other or intertwined. Look at the chart below. As you can see, the pair had been trading sideways, and the indicator's lines were crossing each other. Williams recommended staying out of the market in times of consolidation.

Caption: Times of consolidation

Trend Formation

We can notice the formation of a trend when the fastest moving average (green line) crosses the other two lines. They all should move in one direction. The strength of the trend will reflect the length of the sideways movement. The bigger the distance between the lines, the stronger the trend is. 

Trend Direction

The course of the moving averages simply identifies the trend direction. If they move down and widen even more, it's a strong downtrend signal. If they move up and diverge from each other, it's a sign of a strong uptrend. Note that all three lines are under the price in the uptrend and above the price during the downtrend. 

Nevertheless, it's more important for a trader to determine the direction in the initial stages. You can learn the trend direction following the fastest (green) moving average. If it crosses other lines from top to bottom, it's a signal to sell. When it breaks above both moving averages, it's a signal to buy. 

Trend Strength

You can detect the power of the indicator not only by the spread between the moving averages but the price interaction. If the price goes beyond the green line for short periods, it's a signal that the trend will soon end. The more times the price breaks the green line, the weaker the trend.

How to Apply the Alligator Indicator on the Chart

There's no difference in which trading platform you use. The Williams Alligator is the standard indicator that is always on the list. You don't need to change any Alligator indicator settings. The standard ones work the best. It's even not recommended to change line colours because there's a risk you will get confused while looking for signals. 

Mistakes While Using the Alligator Pattern

The William Alligator is one of the simplest indicators. Nevertheless, some traders, especially beginners, make mistakes using it.

Fake Cross

Although the Alligator indicator is one of the most reliable ones, it may also provide fake signals. If the green line crosses the red line opposite to the existing trend and then gets back, it's a fake cross. One of the indicator's drawbacks is the time lag, which is a common pitfall of all the indicators. You'll likely see the fake cross much later than the price continues moving within the current trend. 

Missed Signals

One of the most important parts of trading is to find the perfect entry. If you don't have much experience in trading with the Alligator indicator, you may have some difficulties. When the Alligator is sleeping (so the lines are either close to each other or entwined), there are frequent crossovers that look like a signal.

However, it's crucial not to get fooled and enter the market without confirmation. Remember, the indicator signals a trend as soon as balance lines move away from each other. Here, it's essential not to procrastinate but to catch the perfect entry point.

Remember that other indicators may give a confirmation too. We'll talk more about it in the "How to Combine the Alligator Indicator" section. 

Missed Profit

Earlier, we stated that the indicator signals the trend strength. Let us remind you that the more frequently the price touches the fastest moving average (green line), the sooner the trend will end. However, it doesn't mean the trend ends immediately. As a result, the most common mistake is that traders close the position earlier than they should. In such a situation, you need to be ready to close the trade soon – but only after a more reliable confirmation either from another indicator or when the distance between the Alligator's lines becomes narrow. 

How to Combine the Indicator

No matter how good the indicator is, you always need to get confirmation of a signal. Let's take a look at the indicators you can use together with the Alligator. As the Alligator stands for the trend indicator, it's worth combining it with another trend indicator but the one that uses a different methodology. For example, Parabolic SAR. It'll help you avoid fake signals that often appear in times of the sideways market.

Another good indicator is the Ichimoku Kinko Hyo. Yes, this indicator is based on the moving averages as well. However, it's one of the most reliable indicators in the forex market.

As for non-trend indicators, you can combine the Alligator with the RSI indicator. The RSI gives strong reversal signals based on the divergence. You can find either a bullish or bearish divergence that the indicator forms with the price chart. As soon as you notice a divergence, it's a signal that the price will move in another direction soon. If you see the price touches the green line frequently or the spread between the lines contracts, it's time to close the position.

Trustworthy Alligator Strategy

You know how to implement the indicator on the chart and read its signals, but it's worth noting one strategy that will bring you potential profit.

Step 1. Open any timeframe you want to trade on and implement the Alligator indicator. 

Step 2. Wait for the fastest line (green line) to cross the other lines upside down. 

Step 3. Place the support level regarding the previous lows.

Step 4. Wait for the candlestick to close below the support level. Open the sell position.

Step 5. Be careful if the price touches the green line. It's a signal of the trend's weakness. 

Step 6. Close the position as soon as the price crosses all three lines. 

Conclusion

Overall, the Williams Alligator indicator is one of the leading indicators all around the world. It became popular because of its accuracy and simplicity.

Bill Williams used pure imagination to explain the indicator. He once said that even a blind chicken will find its corn if it's always fed at the same time, and it took them years to produce an indicator that lets us always keep our powder dry until we reach the blind chicken's market. It's enough of a fast glance at the indicator to understand what is happening in the market. 

Check out available trading tools on a Libertex free demo account. Try out the wide range of the most useful indicators and learn to trade effectively!

Bill Williams invented several indicators. Let's consider two of them.