However, it sometimes doesn’t cross the other lines fast enough to give signals. And that’s why some traders rely on the Alligator breakout strategy. The above diagram illustrates just such an ideal trading example.
The indicator consists of three moving average lines of different periods overlaid on a price chart to show when the market is in a range or trend. In conclusion, the Williams Alligator Indicator is a https://1investing.in/ valuable asset for traders in the complex world of financial markets. This indicator, created by Bill Williams, serves as a guidepost for identifying trends and making well-informed trading decisions.
When you see the alligator awakening, you can also notice a trend change – this is the time for entry. This is a classic breakout trade when the spacing of the Alligator lines is supporting your trade. Pullbacks are price correction in a trend often induced alligator indicator trading system by profit taking. Other signs you may notice are the red (teeth) and blue (jaw) lines starting to chase the lip. At this time, the price is already ahead in the direction of the potential new trend, and you may want to enter a trade in that direction.
Alligator indicator is a trend-following indicator that was first described by Bill Williams in his book called Trading Chaos. Bill Williams likes to use colorful names for his indicators rather than the dry technical names — such as the RSI, ATR, and Stochastic — used by his counterpart. The following steps illustrate how to set up the Alligator indicator in the MetaTrader 4 software. IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority. Discover the range of markets and learn how they work – with IG Academy’s online course. Seeing the indicator works well in Forex trading, as well as in any time frame.
- Similarly, a sell signal is given when the lip crosses the jaw and the teeth to the downside.
- It works in a similar way as an Alligator opens the mouth to capture the prey.
- The fractal indicator is one of the Bill Williams indicators.
- It is a standard offering in most every trading platform, including MetaTrader 4 (MT4) and others proprietary systems, as well.
- Notice that the lag of the TEMA is significantly less when compared to that of the standard EMA.
The MACD, RSI, and stochastic oscillator are some indicators that complement the Alligator indicator in trading. As for a stop loss when using the Alligator, consider using a multiple of the average true range or use previous swing high and lows. On the far right, you can see this pullback failed however there was not break above the yellow line before price began to close under the 3 lines. When the 3 lines of the Alligator indicator are intertwined, the Alligator is sleeping. When an Alligator is sleeping, nothing interesting is going on.
Once you find a Fractal that is either above or below the Alligator’s Teeth, wait for the Alligator to start opening its Jaw, which happens when the three moving averages start to expand. If the Alligator indicator is signaling an uptrend, simply place a Stop Buy order one tick above the Up Fractal in the direction of the trend. Similarly, if the Alligator indicator is signaling a downturn, put a Stop Sell order one tick below the Down Fractal with your broker.
Since this indicator works best with existing strong trends, it will be beneficial for you to apply the indicator to charts that have a strong trend potential. It’s also possible to look for the so-called “fake crosses” or the situations when the green line crosses the red line but then turns back. If such cross happened during an uptrend, you can buy once the green line returns above the red one.
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. 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 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. The Alligator opened its jaws (lines are uncrossed and are moving either upwards or downwards) and eats until it is satisfied. The indicator is used to identify the formation of trends in the market, when the market is trendless, and when a trend is decreasing.
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The signal for a hungry Alligator is after the completion of the waking-up stage, a candle closes below or above the three lines. The trade is moved to the breakeven, according to this strategy, when the Jaw line (the blue one) is below the entry price for a sell trade and above the entry price for a buy trade. This will signal that there should be an entry point to open a position following an uptrend. The lip line should break through the teeth line upside, and the teeth line should cross the jaw line from bottom to top. After the Alligator is full, the market calms down, the balance lines join after they lose direction and begin to intertwine with each other. The market needs a break, and the Alligator falls asleep at that moment.
All indicators have their shortcomings and shouldn’t be used alone or without other confirmations. Remember, forex is a volatile market and a currency pair can experience a price movement of several pips in a very short period of time. Always perform thorough technical and fundamental analysis before opening a position.
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Most of the positive reviews boil down to the fact that the Alligator technical indicator is simple and its signals are clear. It is clear when to open a buy or sell position and when to close. As we use the Alligator momentum indicator alone, without any additional filters, the stop-loss orders should be placed beyond the local lows and highs, depending on the trend. Take Profit levels are set at the breakthrough of important high and lows. When the price hits the highest high in the chart, the price enters a consolidation range. The green balance line crosses the red one, and the red line crosses the blue one.
How the Williams Alligator Indicator Works
As a trend determinant, the Alligator indicator can be included in a strategy with any entry method. For example, you can open using a fast line, and take profit on two other slow ones. Or close deals on opposite signals from other indicators, such as MACD or the Stochastic. While the yellow pullback line gets longer, the Alligator is opening its mouth – the distance between moving averages keeps increasing.
The Alligator is sleeping, as indicated in the upper left of the chart. Remember that the Alligator indicator is shifted from 3 to 8 daily periods forward. The single crossing is your signal to enter a trade, after the closing candle is registered below the Green line. When the Green line flattens or crosses again, it is time to exit. Although the Alligator indicator is one of the most reliable ones, it may also provide fake signals. If the green line crosses the red line opposite to the existing trend and then gets back, it’s a fake cross.
Then the terrible jaws open up – the blue line is lined up in the same direction with the rest. Using those balance lines, also known as moving average lines, the investor can understand when to conduct investment business at his own risk or by using professional investment advice. The Alligator indicator has a unique formula that distinguishes it from a simple set of moving averages. Being based on moving averages, the indicator does react to the price changes with a time lag. At the same time, it can be used both for picking out the start of a new trend and a moment when a trend resumes after a correction. The Alligator is a ready-for-use trading system that can be accompanied by other analytical tools for the greater precision of trading.
The Alligator is used to confirm ongoing trends and their primary direction. In addition to identifying existing trends, seasoned traders also use the alligator indicator to enter counter-trend moves. In this case, there is a “slow” indicator but in the “fast’ timeframe.
Before you start using the indicator to search for trend changes, you should remember that 70-80% of the time, the market is moving sideways. One of the solutions to this problem is the Alligator indicator developed by Bill Williams, a prominent trader. Alligator Indicator is proved to be efficient even in modern conditions of high-frequency (HFT) trading.
When the Alligator is sleeping, the market is range bound and a range trading strategy may be used which can give you a jump into the market early. Keep in mind that a market that is transitioning from a consolidation to a trend, can give false signals. Once the first 2 lines start to pull away from the blue line, the blue line trends in the same direction – the Alligator has opened it’s jaws and is looking to feast. The trader is looking to feast on the price action that is happening.