How to use Alligator Indicator in forex trading?
The Alligator indicator was introduced by Bill Williams in the year 1995. It is one of the most popular indicators in the world of forex trading and is frequently used by traders for understanding and predicting key trends and price momentum. In fact, traders at all levels use this indicator for conducting in-depth technical analysis and designing unique forex strategies for profitable trading. In this article, you’ll learn more about alligator indicator and the different ways in which they can be used for successful forex1 trading.
What is Alligator Indicator?
The alligator indicator basically consists of 3 lines that are displayed on a price chart, which represents the jaw, teeth and lips of an alligator. It helps traders in creating appropriate forex strategies by confirming trends and their directions. This particular indicator also helps the traders in designating impulse as well as corrective wave formation. However, this tool functions best once it is used along with another indicator that is capable of identifying momentum.
The alligator basically helps in describing the market behaviors as and when it begins to go from a non-trending market to a trending one. The basic idea behind it is that when the trend is absent in a market, which is also the period of sideways movement, it denotes an alligator that is sleeping. Finally, the beast wakes up and starts searching for the prey. When the alligator sleeps more it feels a lot hungrier and hence the trend would be stronger in such a case.
Thus, the alligator indicator basically comprises of three different moving averages that smooth over different time-frames that are referred to as balance lines. By gauging the very behavior of these lines, traders can analyze the market structure.
The Alligator Formula
The Alligator formula is pretty simple. It involves the following easy to follow steps:
- The ‘jaw’ of the alligator, which is the blue colored line, is the slowest when compared to the other two. It is basically a 13 period moving average that is shifted ahead by eight bars.
- The ‘teeth’ of the alligator, which is red in color, is the intermediate moving average. This is shifted five bars forward and is smoothed over eight periods.
- The lips of the alligator, which is green in color, is a 5 period moving average that is shifted three bars ahead.
Tips for using the indicator for trading
Apart from providing in-depth technical analysis, the alligator indicator helps the traders in identifying a trend’s absence, trend formation as well as the trend direction.
This is very common in forex trading and it indicates those moments when all the 3 lines of the Alligator indicator are entwined or come close to each other. This also indicates that the alligator is inactive and hence not much is happening in the forex market. Here, the traders wait for a change to take place.
As the alligator awakens, it crosses over the green line via the slower lines and the slower lines follow the same direction and the 3 lines spread apart. Hence, as the alligator’s lips, jaw and teeth move apart, the alligator is shaken from its dormant state and begins eating. If the alligator has remained dormant for a longer period, it will feel hungrier. It is during these periods that the trends would become persistent and the indicator shall become much more effective.
The trend’s direction can be identified as and when there is a movement in the balance lines. The green line moves first followed by red and blue. When the green line moves beyond the slower line it indicates a buying signal. Crossing under them indicates a selling signal. If each of the three widens and moves higher, it implies that the market is witnessing an upward trend. In case the lines move down as well as widens after a selling signal, it means there is a downward trend in the market. With the conclusion of the market trend, the lines come together. The faster moving green colored line indicates that the beast is fully satisfied and hence it’s the best time for traders to take their profits. However, one of the disadvantages of this particular indicator is that it makes it difficult to read the fresh or opening signals at the right time. Also, the period when the alligator is sleeping is when all the three balance lines are entwined or closed. This is when traders witness several crossovers, which appear as trading signals.
Using Other tools with the Alligator Indicator
Traders must understand that none of the trading tools are accurate. Hence, they must use multiple technical indicators and tools along with the Alligator indicator to identify the trends and market momentum. Typically, forex traders must use different methodologies for checking whether their preferred indicator is capable of confirming the trading signals or not. This will help them in ignoring the false trading signals during the phase when the alligator is sleeping. Alternatively, traders can also use the momentum based indicator for identifying the momentum or price divergence for confirming the accuracy of the signal.
The Alligator indicator, designed by Bill Williams, is certainly very different from the other indicators used by forex traders around the globe. While, some traders may find it to be very appealing, others would want to consider other options for calculating forex signals as well as creating effective trading strategies. As far as the Alligator indicator is concerned, it offers easy to remember but vague rules for trading. Hence, traders must test the indicator rigorously before using the indicator. This would help them in identifying whether the indicator actually offers positive or desired results o not. Traders can always create a demo account and use the Alligator indicator for designing appropriate trading strategies and also for determining whether they’re effective or not.
Forex traders must also understand that an alligator has several traits and because the trends take place only a couple of times, the indicator can be used for gauging them only when they’re actually present. After a trend has been formed, traders can use the Alligator indicator to remain in their position and take necessary steps thereafter. It must also be noted that the indicator may not present a 100% accurate picture and can give rise to false trading signals. However, when the signals are positive, traders can gain an edge and thus earn desirable profits. Traders must therefore develop adequate skills for interpreting as well as understanding the signals offered by the Alligator indicator. Additionally, they must also combine the results with other trading tools and patterns for better confirmation of any potential changes in the trend.