Of all the animals that are beloved by humans, alligators rank low on the list. They’re not fluffy, they’re not cute and they eat other species that we inherently feel sorry for. But in the world of Forex trading, the alligator may just become an animal that you grow to love. This is the creature that informed Bill Williams’ indicator. Of which he dreamt up in 1995 to help better predict where a current trend in the market may be heading.
Williams was something of an innovator in the trading world. He was one of the first to implement the notions of behavioral science and psychology into his own indicators and analysis tools.
His conclusion? That Forex traders make most of their money while the market is dormant, i.e. while the alligator is sleeping. When the market awakens, new trends and movements present both opportunities and risks to the trader. And – let’s face it – nobody wants to be gobbled up by a gator that has just risen from its slumber.
The chart features three lines – said to look like an alligator’s jaw, teeth and lips. These depict price movements and, animal analogies aside, the alligator indicator, when used alongside other forms of technical analysis, is a time-served tool that some traders have been using successfully for decades.
The visual representation of the Alligator Indicator also helps to reveal to traders what their next move should be.
The three lines of the indicator can all be entwined at once – as shown on the charts. When this is the case, the alligator is said to be sleeping. Typically, this is said to be a sell signal – usually followed by the candlestick pattern showing as such.
But as the alligator awakens, he gets hungry – his mouth opens and the chart lines separate. This is often considered to be a buy trigger.
Of course, the Forex alligator strategy – like all such systems – is not an exact science. There can be deviations from the mean. But, as a general guide, it can be deployed successfully, as it has been for decades.
The great thing about the Alligator Indicator is that you don’t need to be a numbers whizz to implement it. All the major software platforms like MetaTrader offer automatic creation of the lines.
But what do the lines represent? The ‘jaw’ line is represented by a 13-period Smoothed Moving Average. This is then extrapolated into the future by eight bars. The ‘teeth’ line is an 8-period Smoothed Moving Average moved into the future by five bars. Finally, the ‘lips’ of the alligator is a line moved three bars into the future with a 5-period Smoothed Moving Average.
Visually, the lips line moves first before the teeth follow. This is an indication of a breakout. When the jawline also moves, it’s confirmation of a changing price trend. The hungry alligator is about to get his or her breakfast.
These lines show plenty of insights in themselves, but the true power of the Alligator Indicator is unearthed when combined with a secondary technical indicator. Often an oscillator tool such as the CCI. This can help to reduce the lag of an indicator that is set in the future. Thusly, offering real-time signals in conjunction with the alligator’s activity.
The key to the Alligator Indicator is that it refers to Bill Williams’ original assertion. This is that traders make more money when they know that a trend will continue for the foreseeable future. The longer that the market remains in trend – and the longer that the gator is asleep – the better it is for those speculating on the current price of Forex currencies.
While the visual imagery of the sleeping alligator is a fun introduction to this indicator, this is a serious trading tool. It offers several key insights that can be incorporated into any trading strategy.
When the gator’s mouth slams shut, it’s time to sell. As the gator’s mouth opens, it signals a breakout and the perfect buying opportunity. When the lines of the indicator are wide apart, it signals that the gator is cruising along the river with his mouth open. Thus, is happy to feed on what comes his way. When the lines begin to converge on one another, the gator’s appetite is satisfied. Thereby, signaling a period of sleep is likely and the market will reach the end of its current trend pattern.
The simplicity of the Alligator Indicator is why it is beloved by traders of all types around the world.