Alligator Indicator Explained

Developed by Bill Williams, the Alligator indicator is nothing but a trading system using three moving averages. The word ‘Alligator’ is merely a metaphor depicting the trading system. Because the system uses three moving averages, when the indicators interact with one another, twisting, converging and diverging, Bill Williams named the system as ‘Alligator’

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The Alligator indicator is widely available on almost all trading platforms. But in the event that you do not see the Alligator indicator, simply add three smoothed moving averages of 13, 8 and 5 periods shifted by 8, 5 and 3 bars into the future.

• The longest, 13 period Smoothed MA is known as the Alligator’s Jaw
• The 8 period Smoothed MA is known as the Alligator’s teeth
• The shortest, 5 period Smoothed MA is known as the Alligator’s lips

The chart below shows the Alligator indicator applied to the charts.

The Alligator indicator is a versatile 3 moving average system and therefore it is very ideal even for complete beginners to trading as the rules defined by Bill Williams is very simple and straightforward.

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How to trade with the Alligator Indicator?

To trade with the Alligator Indicator, trading rules are defined in metaphors.

When the Alligator’s jaws, lips and teeth all converge and are intertwined, it is said that the Alligator is asleep. For the average trader, this means staying on the sidelines.

The longer the Alligator is asleep (or the moving averages stay flat and intertwined), the great the potential break out that follows or the hungrier the Alligator gets.

When the Alligator awakes, the moving averages start to diverge and expand, thus resulting in the Alligator starting to feed. This is where traders must enter the position. When prices are trading below the Alligator’s jaws, short positions are taken and can be kept open when the Alligator starts to slope. Positions can be closed, once the Alligator starts to sleep again.

The chart below illustrates the buy, sell signals in relation to the Alligator’s phases.

Alligator Indicator– Buy/Sell Signals

The Alligator trading indicator can be traded as a system by itself; however, additional confirmations from oscillators can be greatly beneficial in terms of fine tuning the entry and exit prices while also preventing traders from taking and fake out positions that arise regularly using the Alligator trading indicator.

Obvious by now, the Alligator indicator is a trend following strategy that makes use of three moving averages. It is reliable in that the system shows when not to trade which helps traders to stay out of the markets when prices are ranging. The Alligator indicator is best used on H4 and higher time frames in order to trade with the larger trend. Another approach is to make use a multi-time frames to pick precise entries. For example, an uptrend on the daily chart would mean that traders can wait for the Alligator to wake up after a small downtrend and then continue to follow the uptrend on the daily chart.

For a trader looking for an easy way to trade the markets, the Alligator indicator is simple and flexible which can be traded all by itself or can be used to compliment any additional trading system.