The Alligator indicator strategy

The Alligator indicator is a technical indicator which based on three simple moving averages with different periods and forward offset. It was developed by Bill Williams, the  author of "Trading chaos" and "New dimensions in stock trading" books. He devised a trading system to predict a Forex price action on the basis of several indicators including the Alligator technical indicator.

The main idea of this Forex indicator is to send a signal when a trend has just started.

The indicator based on Median Price instead of Close price (as in the case with a common simple moving average). Median Price is an arithmetical average of maximum and minimum price of a bar (candle):

 

where:
High — maximum of this bar;
Low  — minimum of this bar;

Formula of moving averages of the Alligator indicator

The first moving average is calculated according to the formula, which is the same for a simple moving average, whereas the difference is that median prices are summed. The second and third moving averages are calculated as per the below formula:

 

 

Description of the Alligator indicator

The first MA with time period of 13 and shift for 8 bars' forward is called the Alligator's Jaw. It traditionally has dark blue colour on the chart. The second MA called the Alligator's teeth, has a period of 8 and shift equal to 5. It is usually red. The third MA called the Alligator's Lips, has period of 5 and shift equal to 3. This is a green-colored line (see image 1).

Alligator’s Jaw = Summa (Median Price, 13, 8)

Alligator’s teeth = Summa (Median Price, 8, 5)

Alligator’s Lips = Summa (Median Price, 5, 3)

 

Image 1. The Alligator indicator by Bill Williams

All the lines of the Alligator technical indicator show levels of price settling on the market under the condition that new factors for different time periods won't impact. Bill Williams called the lines of indicator as “balance lines” and interpreted their position as follows:

- When all lines are entwined, the Alligator is sleeping and the market is under flat, there are no signals for buying and selling (see Image 2);

- The longer Alligator sleeps, the hungrier it gets (see Image 2);

- When chaps of Alligator is opened and prices are above its jaw, trend is ascending (see Image 3);

- When chaps of Alligator is opened and prices are above its lips, trend is descending (see Image 3);

- Entwinement of balance lines after “hunting” is considered to be the moment of profit taking. In other words a trader should close positions after that.

 

Image 2. The Alligator indicator under flat

Image 3. The Alligator indicator during trend

 

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