Forex Trading

What Is the Williams Alligator Indicator and How Do You Trade It?

Do not use Alligator if you don’t trust technical indicators in general or you consider them as too complex instruments for trading, since there is a high risk of losing money rapidly. It is a technical analysis tool that uses a combination of three smoothed moving averages, each displaced into the future, to help traders identify the start and end of trends in the market. The term “displaced” refers to the fact that each moving average is adjusted X bars into the future, which is believed to improve the indicator’s ability to forecast future trend direction. Alligator technical analysis tool is composed of three smoothed lines, which Williams used as the three balance lines and are called Alligator’s lips, teeth, and jaws. The lines are moving averages with different price periods and shift to the future. Developed in 1995 by the professional trader Bill Williams, the Alligator indicator has since become one of the favorite indicators among forex traders.

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  2. The Williams Alligator is the standard indicator that is always on the list.
  3. It doesn’t need to create a separate window for itself and appears as an extra indicator or your main chart.
  4. When the next candlestick closes above or below all moving averages, it is a signal to enter a buy or sell trade.

The difference from 3 moving averages with different periods is that in this indicator, they are also shifted horizontally relative to each other. Depending on the period, the lines are called jaws, teeth, and lips. The Alligator strategy is a simple technical analysis tool and an efficient indicator, suitable for a beginner trader. It indicates the market state, alligator indicator trading system defines the support and resistance levels to enter a trade. Another benefit of the Williams technical indicator is that it generates the entry points when the momentum is just emerging. Every trader that chooses a trading platform and establishes his retail investor accounts wants to enter a trade at good prices and exit at the peak of a trending price movement.

You can use them to know the right time to enter a trade after you have identified a trade setup with the Alligator indicator. The Alligator indicator is very effective in trading a price breakout from a tight range or a chart pattern. When the Alligator is asleep — the lips, teeth, and jaws intertwined — the market may likely be in a range.

Alligator indicator conclusion

However, where you find it depends on the charting platform you’re using. If you’re using Tradingview, simply go to the ‘indicator & strategy’ section and search for Alligator indicator. The name of the indicator is a metaphor that uses the behavior of an alligator to explain the behavior of the indicator in different situations of the market. It can be used in any market including the stock markets, cryptocurrency market, interest rates market, and so on.

Alligator indicator is a trend-following indicator that consists of three moving average lines of 5, 8, and 13 periods, displaced into the future by 3,5, and 8 periods respectively. In an uptrend, look for trade setups where the indicator and a support level meet, but in a downtrend, look for setups where the indicator lines and a resistance level meet. In some situations, the price can pull back much more deeply to the extent that it goes beyond all the moving average lines, only to crossover later and continue in the trend direction.

Step 1: Add the Indicator

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. Three smoothed moving averages used in the Alligator are set at 5, 8, and 13 periods.

Accumulation/Distribution Indicator (A/D) — How to Identify and Use It

He is better known, however, for the many technical indicators that he developed over time to put basic functionality to his proffered theories. One of his favourites was the Alligator Indicator, introduced in 1995, which conjured up the notion of open jaws and feeding time as a way to optimize market entry positions. Gaining an edge in the market is often said to be the proven way to be successful in the forex market, and technical indicators are the tools of the trade.

As with any trading strategy, it is vital that you test it, lay out a trading plan, and ensure risk management is priority one. Trading the financial markets is not as easy as many make it out to be. Popular strategies for using the Alligator indicator include trading ranges and breakouts, pullbacks in price, and cross of the Alligator lines. Also note on the far right, price has broken from the range and pulled back – classic breakout/pullback trade.

The trend has formed with a clear direction

For example, you can exit your buy positions when the lip of the alligator crosses the teeth and the jaw to the bottom side. Similarly, exit all sell positions when the lip of the alligator indicator crosses the teeth and the jaw to the upside. When the alligator’s lip, teeth, and jaw are close, Bill Williams says the alligator is ‘sleeping’.

But when constricted, it signals that a trend is about to end or that the market is in consolidation. However, an important thing to note when backtesting the indicator is that it looks like a heavily lagging indicator at first glance. But remember that the indicators have been shifted by a number of periods into the future. So, whatever signal you had when backtesting was actually for the candlesticks a few periods back. You know how to implement the indicator on the chart and read its signals, but it’s worth noting one strategy that will bring you potential profit. Nevertheless, some traders, especially beginners, make mistakes using it.

When it wakes up from a long sleep, it opens its mouth (moving averages diverge) and gets ready to take a big bite of the market. The Alligator will chase the price far away and offer a decent profit to a trader. Having eaten enough, the Alligator goes back to sleep (moving averages converge), so it’s time to take profit.

The most important part of the Bill Williams Alligator is when the 3 lines are mixed together. This is when the Alligator is considered to be sleeping and no trading signals are present. You should keep these instruments on your radar especially if price action is hinting at an increase in momentum. The best time to get on board a trend move is just before it happens. This is one of the better trend indicators out there if you are looking for both range trading and with trend setups. The Alligator indicator was part of the Bill Williams trading system who suggested markets trend only 15-30% of the time.

It’s essential to remember that no single strategy is foolproof, and traders must adapt their approach to different market conditions. Trading in the financial markets can be a daunting task, but with the right tools, you can improve your chances of success. Note the the green line has crossed over the red to the downside. Remember, these lines are displaced into the future and would have plotted in front of the candlestick we are shorting.

But you can also trade trend confirmations and candlestick breakouts with it. The alligator indicator serves to determine the moments of the flat, to give signals of the beginning and end of the current trend. From a technical point of view, this is a set of moving averages shifted forward relative to the current price by a certain number of bars. Thus, the indicator helps traders predict the future movement in the medium and long term, but with speculative actions and increased volatility, the quality of the signals drops sharply.


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