How To Use Alligator Indicator In Forex
The alligator indicator was created by American trader Bill Williams and is a technical trading indicator used to identify trend direction, momentum and potential reversals.
The indicator is made up of three lines which represent the alligator’s jaw (J), teeth (T) and lips (L).
These lines are used to identify the alligator’s ‘hunting range’ and are based on the moving average price over a number of periods.
The alligator indicator is based on the assumption that when prices are rising, buyers are in control and when prices are falling, sellers are in control. Learning how to use the alligator indicator in forex starts with 3 things.
- The blue line is the alligator’s jaw and is made up of the 13 period moving average, shifted forward by 8 bars.
- The red line is the alligator’s teeth and is made up of the 8 period moving average, shifted forward by 5 bars.
- The green line is the alligator’s lips and is made up of the 5 period moving average, shifted forward by 3 bars.
Alligator Indicator Explained
When the lips (green) cross above the teeth (red line), this is seen as a buy signal as it indicates that the alligator is opening its jaws to eat and that the market is bullish. You can see this taking place on the chart above with the upward pointing arrow.
When the lips cross below the teeth, this is seen as a sell signal as it indicates that the alligator is satiated, closing its jaws and that the market is bearish. This can be seen on the chart above with the second downward pointing arrow.
If you note the periods on the chart above where all 3 lines are moving closely together, this is signifying that the alligator is ‘sleeping‘. This period is a time for market consolidation and indicates no clear trend.
Part of the issue with the chart above is the lack of clear overall trend. With such chop between upward and downward moves, the alligator indicator is failing in some cases to give you the best possible exits during crossovers due to the fact it is a lagging indicator.
It is best to use the alligator indicator in combination with other indicators to confirm signals as the alligator. Many would consider using RSI, or MACD as a good potential partner for the alligator indicator.
The alligator indicator can be used on any time frame and can be applied to Forex, stocks, commodities and even indices.
Simple Alligator Indicator Strategy
As an easy way to remember the signals is in colour form, with the green line (lips) being your ‘action’ signal.
When the lips are above the teeth, the alligator can feed (bite) and the indicator is saying ‘buy’.
In the inverse, when the lip is over the teeth or when the green line starts to go below red, the indicator is telling you to ‘sell’.
You cannot bite with teeth when your lips are blocking them, and the alligator indicator is the same.
One of the best ways to use the alligator indicator strategy is to wait for a buy signal when the lips crosses above the teeth and to use a stop loss below the teeth.
For a sell signal, wait for the lips to cross below the teeth and then use a stop loss above the teeth.
The alligator indicator can be a great tool to help you identify trend direction and potential reversals in the market.
You can see from the chart below an example of this in practice.
- There is the action of green crossing red upwards as the start of the positive move is about to take place.
- You then begin to see the width between the 3 lines widen as the move becomes more aggressive.
- As the distance begins to narrow between the green and red line towards the end of the chart this is indicating a slowdown in trend.
- There is even a potential reversal of trend shaping up as the green line (lip) appears set to dip below the red (teeth).
The creation of the alligator indicator forex strategy
The alligator indicator was created by trader and author Bill M Williams in the 1980s. He named it after the alligators he observed in the swamps of Louisiana, which seemed to move slowly and methodically until they struck with great speed.
Williams wanted to create an indicator that would help traders predict when a market was about to move, and the alligator indicator has been one of the most popular indicators ever since.
With a trading history that stretches back some 50 years, Bill Williams is a renowned author and creator of multiple trading indicators for forex, stocks and commodities. Some of the indicators commonly used include the Awesome Oscillator and the Market Facilitation Indicator.
If you are interested to read more about Bill Williams’ trading theories and strategies, you can find them here on Amazon.
How successful is alligator indicator trading?
The alligator indicator can be a very effective tool for forex traders but requires some experience to get the right ‘feel’.
Even though the creator of the indicator believed that the market follows trends only 15-30% of the time, if you combine the alligator indicator trading strategy with other leading indicators or momentum indicators, this can be highly successful.
It is practically impossible to put an exact percentage chance to the overall alligator indicator trading strategy but if you are able to maintain proper risk management and use a good profit to loss ratio on each of your trade setups, we have found this to be an indicator that can definitely work to good effect.
As with all trading plans, alligator indicator trading success will largely be driven by yourself and a combination of other factors, and not the indicator alone. You can try to amplify success by verifying proven forex signals with the alligator indicator for confirmation.
Overall, aiming for a 60%+ ratio of win/loss with a 2:1 ratio of P/L value will put you in good shape.