Introduced by Bill Williams in 1995, the Alligator Strategy which is as much a metaphor as it’s an indicator is a system that uses three displaced moving averages to isolate market trends.
It helps to evaluate the dynamics of the price and shows the interaction of the price behavior in different time intervals.
This indicator also helps Forex traders designate proper and corrective wave formations especially when combined with a momentum indicator.
The characteristic of the Alligator which mostly related to his eating and sleeping habits.
Basically, the Alligator consists of three lines namely Lips (green), Jaws (blue) and Teeth (red).
When the lines come together, the alligator falls “asleep” (no significant changes occur) but when the lines branch off, the alligator “wakes up” and starts hunting’ either on the down trend or the up-trend.
The alligator goes to sleep once it is satiated.
On the other hand, you will often find most traders adding an Oscillator such as the CCI just to improve the value of their trading signals.
Once the indicator wakes up, the lips (green line) moves first followed by the teeth (red line) in order to confirm a breakout in another different direction.
In addition, to confirm a valid alligator break-out, always look out for impulsive moves when the moving average aligns.
This indicator works best the longer the period of sleep.
The system is good at keeping traders out of the market when it is going sideways.
Proper skills in understanding and interpreting the Alligator signals must be developed with time.
As with any technical indicator, the Alligator will never be 100 percent correct.
False signals are prone to occur as timing may lag but the positive signals are consistent enough to give any trader the required edge to succeed.
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