Alligator Indicator: Analyzing Forex Trends Like A Pro – The Alligator indicator uses moving averages and the theory of fractals in Bill Williams’ original interpretation.
The author’s description in the book “Trading Chaos: Maximizing Profits with Proven Technical Techniques” and “A New Trading Scale…” is generally related to the operation of modern instruments.
Alligator Indicator: Analyzing Forex Trends Like A Pro
Financial markets spend 70-80% of trading time without clear direction and only 20-30% – favorable trend for profit.
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The Alligator indicator is part of the popular strategy Profitability – to detect flat periods, to give a start / stop signal and to estimate the strength of the trend.
Technically, it is applied to moving averages (“futures”) that move forward across a number of bars.
It allows for short-term and medium-term price forecasting, but the quality of the signal depends on the stability of the market.
The price estimation throw problem is solved by smoothing (smooth method) and also by applying PriceMedian instead of PriceClose.
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The calculation starts with a simple moving average price, and further, it is calculated by the formula:
As long as the price is not affected by other strong factors, each of them is considered as the balance line (“fair” price), as a rule – basic.
The classical version of Alligator is included in the set of all trading platforms, with settings for creating moving averages and a color scale that is recommended not to change.
Periods, types of moving averages, and shift indicators correspond to the Fibonacci number because they consistently offset the effects of mutual lag.
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For this reason, Alligator does not allow multiple treatments in any market, and the parameters of the lines change very rarely.
Alligator is an example of trade marks in progress or deviating from the boundaries of territory and power levels.
All the lines move horizontally, they are closely connected and the price fluctuates in a narrow range around the red.
The longer the flat period, the more “hungry” the alligator is: the stronger the bounce and the longer the new trend.
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The fastest AlligatorsLips (green) react before the market moves – in the direction of price pressure.
Gradually lines are built in order of importance, the distance between them increases (the “hunting” period opens).
If the interest of the market participants is not weakened, then the red alligators teeth will begin to respond after the green ones, and the slow blue AlligatorsJaw line will always develop last.
The retracement of lines before a turn or merger (the trader loses interest in the “food”) is considered the closing time of the positions.
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To turn, the lines must be crossed in a strict order: green-red-blue, their relative position is maintained during the trend.
There is a reverse crossing of lines on a curve or a flat transition, but it is mandatory – according to the same scheme.
A price crossing of all three lines will be a strong signal for market entry; The marketing back from AlligatorsTeeth looks even more dangerous.
Price punches the key line from above and closes below the crossover point.
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The degree of volatility is defined by the distance from the green to the blue line, and the bending angle allows to estimate the power of the new trend.
Which of the indicator lines is chosen as the key to open a position, and where the stop loss should be, based on the level of risk, is convenient for the trader.
If you place a Stop Loss behind the AlligatorsJaw line, the position will stabilize with normal volatility, but the risk may be higher when you exit the trade.
A stop loss load on the fastest AlligatorsLips allows you to close a position on a small bump in a trend that does not yield stable profits.
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It would be reasonable to divide the amount of the position into 3 parts, that is, for the 1st part of the transaction, stop loss behind the AlligatorsJaw line, for the 2nd – behind the Alligators’ teeth, we close the remaining amount in case of discovery of AlligatorsLips.
The flexible path on the lines allows to hold the pressure for a short time, but release it in time if the time has passed.
We stay out of the market until the first breakout (below) of all three Alligator lines – this means that the price has punched the boundaries of the ranges and is already showing a technical recovery.
If the fragment appears in the intersection zone of the alligator’s lines – we ignore the sign.
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After the reversal, when the price crosses the fractal level for the second time – we place an extended BuyStop/SellStop order 2-3 points higher/lower.
SMA (233) is used for the definition of a long-term trend: the price is higher than the line – up, it goes down – bearish, the line is horizontal – there is no trend.
When we perform the main condition on fractals, we use stochastic as a filter for false signals: if the lines confirm the movement down (turning higher than level 70/80) – for sale or up (turning higher than level 20/30 ) – for buying.
Entry and risk techniques can be combined – to enter quickly and lock in profits – slowly.
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The Alligator indicator can help to identify the sign of Elliott waves: if the price is behind the boundaries of “AlligatorsJaw”, the market will form a pulse wave and if it is in the zone – correction.
The Alligator defect is a calculation method on the moving average system: the first signs of a trend, as a rule, are delayed.
If confirmation, for example, with an oscillator, the technique is effective on the time frames from M15 to D1 and allows taking 60% of the price movement of any trend.
Once all sides of the indicator are revealed, it’s time to test it, or it will be your #1 trading tool.
Bill Williams Alligator
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The blue line (alligator’s jaw) is the time frame balance line used to construct the chart (a 13-period smooth moving average, carried forward by 8 bars).
The red line (alligator’s teeth) is the one-step low price time frame equilibrium line (8-period smooth moving average,
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