The Alligator Indicator by Bill Williams FBS Trading Handbook

He wanted to create an indicator that could help traders identify these trends and potential trading opportunities. By studying the behavior of an alligator, he found a metaphor that perfectly captured the essence of market dynamics. The concept explains that any individual or financial institution will actively trade during these trending times to take maximum advantage of the market price movements to earn profits. The Alligator Indicator provides traders with a visual representation of market trends. By analyzing the slope and position of the lines, traders can determine the direction of the trend.

• In the chart below, for instance, we’re using the breakout strategy on the EURUSD 4-hour chart.
• The sleeping period is shown when the lines are intertwined and close together.
• It is better not to take any trade when the lines cross each other because it shows that there is not much activity in the market.
• He also believed that it is in these scarce trends that the trader has the highest chance of making money.
• Theoretically, Bill Williams believed that the market only moved in trends 15% to 30% of the time.

What is the best charting software for trading the Alligator indicator?

The Alligator Indicator’s signals can be interpreted through the alignment and separation of its components—the Jaw, Teeth, and Lips. When these three moving averages are entwined, it suggests that the market is ‘sleeping,’ and no clear trend is present. This is usually a time for me to be cautious and refrain from making any major trading moves. This line is an 8-period smoothed moving average, shifted 5 bars forward. The Teeth are crucial for me alligator indicator as they bridge the gap between the long-term trend indicated by the Jaw and the short-term trend suggested by the Lips.

Alligator Indicator: How To Use and Read the Williams Alligator Indicator? (Example Analysis and Definition)

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 indicator is used to identify the formation of trends in the market, when the market is trendless, and when a trend is decreasing.

How To Use In Forex Trading?

The initial smoothed average is calculated with an SMA, adding smoothed averages that slow down indicator turns. The Alligator Indicator Strategy is a highly effective trading tool when used correctly. However, like any trading strategy, it’s essential to remember that it’s not infallible. Use cot reports for underlying trading ideas and maintain a solid risk management practice to protect your investment.

Common Chart Indicators: A Complete Overview

This is a state whereby the three lines of the Alligator indicator are intertwined or close together. By now you know that there are three crucial information shown by the Alligator indicator. Second, the start of a new trend, and thirdly, the direction of the trend. In the chart below, for instance, we’re using the breakout strategy on the EURUSD 4-hour chart. We wait for the candlestick to complete a breakout of the lip, and we open an appropriate position; hence, a long buying position. In terms of display, the Williams Alligator indicator overlays on your chart.

If the green line moves in the same direction as the red and blue and moves above both, there is an uptrend. All three are in the same direction, but the green line moves below the red and blue lines, which is a downtrend. However, the alligator indicator formula for the simple moving average calculation is given below.

His idea was to provide an example that would demonstrate the behavior of the market. In this case, the example is the alligator, which alternates between periods of sleep and hunting. It is clearly seen that wherever the green line crosses the red and blue lines and moves up, an uptrend will take place for the subsequent few trading sessions. Step #5 – Finally, the trader has to use the best settings for alligator indicator to place the order. An uptrend will mean a long position or buy order, and a downtrend will mean selling off the asset or taking a short position.

When the lines are intertwined, it suggests that the market is in a state of consolidation, and traders may want to avoid taking positions. On the other hand, when the lines are diverging, it indicates the potential for a trending market, and traders may consider entering positions in the direction of the trend. You can see that he also gave creative names to the indicator and its elements.

Overall, the trades underperformed a buy-and-hold strategy on weekly and daily charts. 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.

• Overall, the trades underperformed a buy-and-hold strategy on weekly and daily charts.
• However, in sideways or choppy markets, it may produce false signals, leading to potential losses.
• 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.
• Step #6 – It is better to hold on to the trade till the lines are away from each other.

These averages are smoothed over different time frames and are designed to align and signal market trends based on their convergence, divergence, and the order they follow. Each of these averages represents a specific part of the alligator’s anatomy, which I will delve into shortly. 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.

Its primary purpose is to spot these trends and determine possible market entry and exit points. HowToTrade.com helps traders of all levels learn how to trade the financial markets. This is where you refer to any of the Williams Alligator trading strategies we discussed. You could use the crossover, the breakout, or even combine the indicator with other indicators to identify trading opportunities. Remember that this indicator appears on your chart as three lines constantly crossing over one another.

It’s also possible to look for “fake crosses” — situations when the green line crosses the red line, but then turns back. If such a cross happens during an uptrend, you can buy once the green line returns to above the red one. If the alligator is not asleep, the market is either in an uptrend or a downtrend.

This is where the alligator ‘awakens’ or ‘falls asleep,’ and these moments are critical for making trading decisions. The Lips can often act as the trigger line for entering or exiting trades. Testing on a 4-hour chart proved highly profitable; 50% of trades were profitable, and the average win was 23% versus a 5% loss. Using the Alligator Indicator, traders in both forex and individual securities markets can gain clearer insights into market dynamics and price behavior. This use of symbolism helps traders quickly understand market conditions based on the Alligator’s behavior.

Increasing divergence often indicates the strengthening of a trend, while convergence can signal a potential reversal or weakening trend. It is these nuances that help me make nuanced trading decisions based on the alligator’s state. This section provides insights on how to use the indicator effectively on trading platforms and offers real-world examples of its application.