- The Williams Alligator indicator is composed of 3 lines.
- Each line is a Moving Average is a different period (5-8-13).
- It helps traders understand the market trend and potential reversal.
- When the fastest line is above the middle one which is above the slow one, trend is up. When it’s the opposite, trend is down.
The late, iconic forex trader, Bill Williams made the Williams Alligator technical analysis indicator in 1995. He has given the indicator his name. He was also created other leading indicators commonly used by traders today. Some of those indicators are the Williams Fractal, Awesome Oscillator, and the Accelerator/Decelerator Oscillator.
The Alligator indicator follows the premise that financial markets and individual securities trend just 15-30 percent of the time. While grinding through sideways ranges the other 70-85 percent of the time. The developer believed that individuals and institutions collect most of their profits during strongly trending periods.
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What is the Williams Alligator indicator?
The Alligator is as much a metaphor as it is an indicator. Three lines make the indicator, overlaid on a pricing chart. They represent the jaw, the teeth, and the lips of the beast.
He created it to assist traders confirm the presence of a trend and its direction. The indicator can also assist traders designate impulse and corrective wave formations. But it works best when used together with a momentum indicator.
There are various “traits” of the Alligator. If you mix the three lines, the mouth of the Alligator closes and traders say it is sleeping. As it sleeps, it gets hungrier by the minute, waiting for a breakout from its slumber when it will eat.
When the trend takes shape, the Alligator wakes and begins eating. Once full, it closes its mouth once again and goes back to sleep.
The Alligator indicator makes use of three smoothed moving averages, set at 5, 8, and 13 periods. They are all Fibonacci numbers. Calcualte the first smoothed average with a simple moving average, adding smoothed averages that slow the indicator’s turns.
Importance of the Williams Alligator
The creator of the indicator was an early pioneer in financial market psychology. He made some of the most widely used technical indicators today. You can use the Williams Alligator indicator to find the absence of a trend.
Also, trends that are starting to form and markets that have started trending. Technical traders can use this information to decide when to enter or leave the market.
How does the Williams Alligator work
He created the indicator on the rule that the asset should trend between 15 and 30 percent of the time. They do this while stuck in a tight trading range the other 85 and 70 percent of the time.
The creator was sure that the former is when most institutional traders book most of their profits. Also, the moving averages that make up the Alligator indicator can often act as dynamic resistance or support. You can use it as a buy or sell signal depending on which way the lines crosses. Also, if candlesticks close above or below the lines of the indicator.
The Alligator is as much a metaphor as it is an indicator. Three lines make up the indicator, overlaid on a pricing chart. Williams created it to assist traders in confirming the presence of a trend and its direction.
The Alligator indicator can also assist technical traders to determine impulse and corrective wave formations. But it works best when combined with a momentum indicator.
The calculation formula sequence involves these 3 steps
- The Jaw of the Alligator, the “Blue” line, is a 13-period smoothed moving average. Eight bars move it into the future.
- The Teeth of the Alligator, the “Red” line, is an 8-period smoothed moving average. Five bars move it into the future.
- The Lips of the Alligator, the “Green” line, is a 5-period smoothed moving average. Three bars move it into the future.
Three smoothed moving averages make up this indicator. Traders will occasionally add an “Oscillator” such as the “CCI” to enhance the value of the trading signals. Trading mixes the “Jaw”, “Teeth”, and “Lips” while the Alligator sleeps during the initial part of the price action depicted.
The Green line moves first when the Alligator wakes up. The red line follows, to confirm a breakout in a new direction. The CCI sent an overbought alert first. The Alligator lagged, but confirmed the signal after a candle closed below the three-line set.
The weakness in the indicator is that timing may delay as a result to its future positioning. This is why you need to attach a momentum indicator to anticipate the signal of an Alligator.
The Alligator helps traders remain in the position for a longer time and works best the longer the sleep period. In the above example, you would remain in the trade until a candle ends over the middle Red line.
Williams also created a “Gator” histogram indicator to assist with visual interpretation. Other traders have included their ideas to enhance the reliability of this indicator.
The indicator makes use of convergence-divergence relationships to develop trading signals. The Jaw makes the slowest turns and the Lips make the fastest turns.
The Lips crossing down through the other lines indicates an opportunity of a short sale. While crossing upward indicates an opportunity to buy.
How to use the Alligator Indicator
The indicator provides signals when the three lines – Jaw, Teeth, and Lips meet and separate. They signal a change in trend.
When the three lines diverge widely, a trend is strong indicating that the mouth of the alligator is being fed. This is according to Williams.
But when the three lines start narrowing and converging, it shows that a trend is weakening and may soon reverse. It also shows that a strong move is near.
Traders will then want to observe for a cross of the blue and green lines. They also observe for a close of a candle through the lines of the indicator before taking action.
Combining the Alligator indicator with other trading tools
No trading tool is perfect. This means that traders are always looking for means to apply various indicators. Some traders may look at a trend indicator that uses a different method to see if it confirms the signals. This is in relation to using an Alligator indicator for instance.
This will help get rid of false signals in the sleeping phase of the Alligator indicator. It might also improve the timing of the trading signals.
Tips for traders and common mistakes you should avoid with the Alligator indicator
It is common for traders to get caught up in market chop when using the Williams Alligator. According to Williams, during that situation, the alligator is still sleeping and is yet to awaken. This suggests that traders need to wait for other confirmation. They should also wait for the price to reflect the trend change signaled by the indicator.
Traders should try to look at a mouth opening during price rise or decline. They slowly close once again when volatility dwindles, showing a potential trend change ahead due to the current trend weakening.
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Williams Alligator indicator is a complex, but very important and profitable technical analysis tool. One of the most legendary forex traders to ever live made this indicator. Traders can use it across forex, commodities, stock indices, and cryptocurrencies – among the many financial assets.
Trading software can be expensive, but some platforms feature built-in charting tools right within the trading dashboard. This offers incredible value for traders.
Applying tools such as the Williams Alligator and stop-loss protection makes it possible for traders to grow their profits quickly, safely, and using very little starting capital.