Last Updated on 10 February, 2024 by Trading System

Alligator Indicator: What Is the Williams Alligator Indicator?

The market experiences sideways movement most of the time and spends about 15-30% of the time in a trend. Most traders get most of their profits from when the market is trending. There are many indicators that traders use to identify trend, but only a few can match the alligator indicator. So, what is it?

The Williams Alligator Indicator is a technical analysis tool that is used to identify and gauge the strength of a trend. It provides signals when a new trend is in motion and also tells you when there is no trend.

To help you understand the alligator indicator and how to use it in trading, we will discuss the topic under the following headings:

• What is the Alligator indicator?
• How does the Alligator indicator work?
• The Alligator indicator calculation formula
• How do you trade the Alligator indicator in forex?
• An example Alligator trading system
• How to set up the Alligator indicator in MetaTrader 4.

What is the Alligator indicator?

The Alligator indicator, also known as the Williams Alligator indicator, is a technical analysis tool developed by Bill Williams. It consists of three moving average lines that converge or diverge according to the state of the trend.

The indicator is used to identify the formation of trends in the market, when the market is trendless, and when a trend is decreasing. Its primary purpose is to spot these trends and determine possible market entry and exit points.

How does the Alligator indicator work?

The Alligator works by plotting different moving averages on a chart. It uses three moving averages, and each represents part of the “Alligator”: a blue line representing the jaw, a red line representing the teeth, and a green line representing the lips. These are the default colors. However, you can customize them according to your preference.

Three smoothed moving averages used in the Alligator are set at 5, 8, and 13 periods. These numbers are all Fibonacci numbers. The first smoothed average is calculated with a simple moving average (SMA), adding smoothed averages that slows down the indicator turn.

The following analogy explains how the Alligator indicator operates. The Alligator is said to be tired or sleeping when all three moving averages (Mas) are intertwined — i.e. the jaw, teeth, and lips are closed, indicated by the black arrow. At this particular point, many traders will avoid taking a position as this is perceived as a weak trend or consolidation, as shown in (fig 1.0).

fig 1.0. Cocoa futures daily chart

Source: Metatrader 5

The more time the Alligator spends sleeping, the hungrier it becomes and when it wakes up; When it eventually wakes and is prepared to hunt bulls and bears, see fig. 1.1 below. The Alligator opened its jaws (lines are uncrossed and are moving either upwards or downwards) and eats until it is satisfied.

fig. 1.1. Cocoa futures daily chart

Source: Metatrader 5

When the Alligator is pretty full and has lost interest in the food, it closes its mouth (lines intertwine or move closer together). Some traders at this point will close their positions if they’ve made a profit, as the uptrend or downtrend may have come to a standstill i.e. the market is becoming range bound.

The Alligator indicator calculation formula

The Alligator indicator is calculated using the following parameters:

• A simple moving average (SMA):

Sum1 = sum (close,N)

SMMA1 = sum1/N

• Final values are:

Previous Sum = SMMA(i-1) *N

SMMA(i) = (Previous Sum-SMMA(i-1)+Close(i))/N

Where:

Sum1 – the sum of closing prices for N periods;

The previous Sum – smoothed sum of the previous bar;

SMMA1 – smoothed moving average of the first bar;

SMMA(i) – smoothed moving average of the current bar (excluding the first one);

Close(i) – current closing price;

N – the smoothing period.

While it is important to know how the indicator is calculated for a better understanding of the inner mechanism of the indicator, you don’t need to calculate this all by yourself because your trading software will automatically do it for you. The Alligator indicator can be added to your charts from the indicator list in your trading software.

The three moving averages (MAs) make up the jaw, teeth, and lips of the Alligator, expanding and intertwining in reaction to changes in market trends.

• The Jaw (blue line) is set up with the 13-bar SMMA and is smoothed by 8-bars on subsequent values.
• The teeth (red line) are set up with the 8-bar SMMA and are smoothed by 5-bars on subsequent values.
• The lip (green line) is set up with the 5-bar SMMA and smoothed by 3-bars on subsequent values.

How to read an Alligator chart

There are three key pieces of information shown by the Alligator indicator: the three keys are the absence of a trend, the start of a new trend, and lastly the direction of the trend. Knowing what each means will help you in dissecting the information from the market.

fig 1.3. Micro E-mini Dowjones daily chart
The chart below further illustrates it for your understanding.

Source: Metatrader 5

The orange ellipse showed that the market is moving sideways. The Alligator, during this period, is said to be sleeping (lines are intertwined), before that it had fed pretty much (prior uptrend). Now that we know that the Alligator is sleeping, we wait for the formation of a new trend. This was confirmed when the Alligator’s Lips (green line) crossed above the two slower lines (blue and red). The direction was confirmed as the lines diverged and we saw an uptrend that lasted from mid-May to early October.

How do you trade the Alligator indicator?

By now you know that there are three crucial information shown by the Alligator indicator. First, the absence of a trend. Second, the start of a new trend, and thirdly, the direction of the trend.

Let’s discuss these three keys each and illustrate how you can use them in trading Forex.

The Absence of a trend

This is a state whereby the three lines of the Alligator indicator are intertwined or close together.

Fig. 1.4. EUR/USD daily chart

Source: Metatrader 5

We can see in the left section of our EUR/USD chart above indicated by the ellipse where all three lines (blue, red, and green) all closed together. This means that the Alligator is sleeping or is tired — implying that the market is not doing anything and that we should wait for the start of a new trend.

The formation of a trend

When the Alligator is showing a crossover of the fast green line above or below the slower lines (blue and red), with all three lines diverging as indicated in fig. 1.3, the Alligator has woken up and is eating. The longer the Alligator spends sleeping, the hungrier it becomes when it wakes, and we can expect it to maintain its hunt for food — in this case, a trend in any direction. These periods when trends are forming seem to be the most effective to trade using this indicator.

fig 1.5. EUR/USD daily chart

Source: Metatrader 5

Looking at the above, we saw that a crossover of the green line to the upside with the other lines turning to that direction (black arrow) showed a rally until the Alligator was satisfied in late August, it slept through till late October before waking up in November where we saw another rally. We can therefore say that a crossover of the green line to the upside indicates a buy signal while a crossover to the downside indicates a sell signal.

The direction of the trend

The trend direction is indicated by the movement of the balance lines. As the green line is first to react to changes, we expect it to make the first move, followed by the red line, and finally, the blue line which is the slowest line. When the green line crosses above the two lines to the upside, it indicates a buy signal. While a cross below the two slower lines Indicates a sell signal.

If, during a cross to the upside, all three lines expand, it confirms an uptrend. A cross to the downside with expanding lines confirms a downtrend.

As the trend power decreases and eventually comes to an end, the balance lines come closer together. The fast green line making cross back over the slower lines tells us that the Alligator has had its fill of food and therefore satisfied, thus a sign for you to take your profit. The most important feature of this indicator is the way it helps you to stay with a continuous trend. One of the downfalls of the indicator is the difficulty it presents — where to enter the market on time is often difficult to spot.

The sleeping period is shown when the lines are intertwined and close together. You will see many crossovers that look like trading signals but the key point is to spot the confirmatory divergence of the balanced lines — and doing so timely so as not to miss too much of the start of the trend.

In the daily Palladium futures chart shown below (fig 1.4), the orange arrow shows a sell signal — you can see the green line crossed below the slower lines and then all three lines expand, indicating that the Alligator has started feeding.

fig 1.6. Palladium futures daily chart

Source: Metatrader 5

An example Alligator trading system

fig 1.7. EUR/USD hourly chart

Source: Metatrader 5

The EUR/USD hourly chart above has an “awakening” signal at the left of the chart (black ellipse), then there was a small rally showing an Alligator “eating with an open mouth” phase as indicated by the first arrow. Afterward, the Alligator slept for a brief period (second ellipse) before the fast line crossed below the slower lines (second arrow indicated a trend change to the downside), an expanding line confirms a downtrend. On the decline, the price rose to the jawline but the indicator did not respect this crossing for long as it declined and continued the initial downtrend. An Alligator sell signal arrived when the green line crossed below the two slower lines (blue and red) and the line intertwined as the price moved sideways for a brief period.

Then the Alligator woke and an uptrend commenced (indicated by the third arrow), the “eating with an open mouth” phase. The price continues to rise extremely until the Alligator became sated and then slept for a brief period and the cycles continue again and again.

Here’s another chart below:

fig 1.5. Micro E-mini Dowjones daily chart

Source: Metatrader 5

The same principles apply to the E-mini Dowjones futures. As you can see in June 2018 (first arrow), there was a crossover of the green line to the upside indicating an uptrend and then an expansion of the line confirms the trend move. Since we are only taking long positions, we waited until the market correction ended in late December before taking another long position (second arrow). Although we saw a minor retracement along the line, the market was still well in an uptrend. For a market like this that is often in an uptrend, you can use the Alligator to spot potential retracement and use it to hedge your position.

The Alligator indicator is not limited to one market. It can be used in any market including the stock markets, cryptocurrency market, interest rates market, and so on.

How to set up the Alligator indicator in MetaTrader 4

The following steps illustrate how to set up the Alligator indicator in the MetaTrader 4 software.

• Download the MetaTrader 4 software
• Open the chart you want to apply the indicator on
• Click on the insert indicator
• Select the Bill Williams trader tools
• Now click on the Bill Williams Alligator
• The parameters are set to default but you can customize it to your preference.
• Then click ok and the green lips, the red teeth, and the blue jaws will all appear on your chart.
• It is now ready to be used for trading

Final words – Alligator Indicator

The Bill Williams Alligator indicator offers more colorful imagery to trading than other indicators. Although the Alligator indicator helps, the rules in using it are a bit vague. Therefore, it is necessary to test the indicator using a virtual account before using it, to know when to enter the market at the right time. Also, it’s to be noted that there’s no such thing as the Holy Grail indicator in trading. All indicators have their shortcomings and shouldn’t be used alone or without other confirmations.

FAQ

What is the Alligator indicator, and how does it help in technical analysis?

Answer: The Alligator indicator, developed by Bill Williams, consists of three moving average lines representing the jaw, teeth, and lips. It helps identify trends, trendlessness, and trend reversals in the market, aiding traders in making informed decisions about market entry and exit points.

How do you trade the Alligator indicator, and what are the key signals to look for?

Answer: Trading the Alligator involves understanding three key signals: the absence of a trend, the formation of a new trend, and the direction of the trend. Absence of a trend is identified when the lines are closely intertwined. A new trend begins with the green line crossing above or below the slower lines, and the trend direction is confirmed by the divergence of the lines.

How does the Alligator indicator perform in different market conditions?

Answer: The Alligator indicator is versatile and can be applied to various markets, including stocks, cryptocurrencies, and more. Its effectiveness may vary based on market conditions, and traders should adapt their strategies accordingly. Understanding the indicator’s performance in different market scenarios enhances its overall utility.