Alligator Indicator Trading Complete Guide

Remember, the indicator signals a trend as soon as balance lines move away from each other. Here, it’s essential not to procrastinate but to catch the perfect entry point. The risks of loss from investing in CFDs can be substantial and the value of your investments may fluctuate. 75% of retail client accounts lose money when trading CFDs, with this investment provider. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage.

If either of your predictions are wrong, you’ll make a loss. Bill Williams, the trader who developed the alligator indicator, believed that markets only follow a trend 15% to 30% of the time. Let’s explore the alligator indicator and see how it’s used to identify trends in forex trading. Bill Williams refers to these moving averages as “balance lines”. You can see that he also gave creative names to the indicator and its elements. His idea was to provide an example that will demonstrate the behavior of the market.

It indicates the market state, defines the support and resistance levels to enter a trade. It helps to enter a trade at the very beginning of a trend. The first type of trading with the Bill Williams’ Alligator indicator suggests you don’t use any additional trading tools. The second type of trading strategy employs additional filters to spot entry points.

We can see in the left section of our EUR/USD chart above indicated by the ellipse where all three lines all closed together. This means that the Alligator is sleeping or is tired — implying that the market is not doing anything and that we should wait for the start of a new trend. Alligator indicator is a trend-following indicator that consists of three moving average lines of 5, 8, and 13 periods, displaced into the future by 3,5, and 8 periods respectively. You should keep one thing at the back of your mind though — being a moving average based indicator, the Alligator does significantly lag the price. Moreover, the moving averages are shifted by 3, 5, and 8 periods into the futures.

How to read an Alligator chart

It generates the entry points at the momentum inception and signals the trend exhaustion. Personally, I prefer to use the indicator on the H1 timeframe. This is the optimal timeframe for short-term trading with a trade holding time of 1 to 5 days. Different Alligator indicator settings apply to trading in different timeframes.

The following steps illustrate how to set up the Alligator indicator in the MetaTrader 4 software. How to set up the Alligator indicator in MetaTrader 4. A ranging market is one in which the price swings up and down without making a significant displacement to the upside or downside — the market simply moves sideways. Bill Williams uses the behavior of an alligator to explain what is happening in the market.

It is easy to fix the indicator to your price chart because it is one of the indicators that are naturally present in most charting platform. This perfectly corresponds to how an alligator opens its mouth — the lips first, the teeth, and then, the jaws. Any dowmarkets broker: is this a scam or not? opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. Join thousands of traders who choose a mobile-first broker for trading the markets.

The trend may start

Being based on moving averages, the indicator does react to the price changes with a time lag. At the same time, it can be used both for picking out the start of a new trend and a moment when a trend resumes after a correction. The Alligator is a ready-for-use trading system that can be accompanied by other analytical tools for the greater precision of trading. When you use the Alligator, check several timeframes of the chart.

The price should be trading below all the Alligator lines. Starting from the European trading session, the Alligator begins to wake up, the lines start to line up. During the first trading hours of the European session, the price closes above the Alligator’s mouth. We notice this moment and decide to look for an entry point to buy gold.

• Its purpose is to identify a trend and its direction and filter good signals from the bad ones thus avoiding the range-bound market that can lead to loses.
• Here you can see obvious pullbacks that have pulled to the green and red line while the blue kept the upwards slope.
• Being based on moving averages, the indicator does react to the price changes with a time lag.
• At the end of the trading session on January 18, 2021 – the beginning of the trading session on January 19, 2021, the Alligator fell asleep.
• Each of them is considered the line of balance (the «fair» price) for the time period provided that the price isn’t influenced by other strong factors, as a rule – fundamental.
• SMMA (MedianPrice; 8; 5) – the similar moving average displaced on 5 bars forward; AlligatorsTeeth, color – red.

The alligator indicator comes built into the Metatrader platform, therefore attracts a lot of attention due to that alone. Number 1 indicates that the entry conditions to go short according to the Alligator strategy are met. If the price does not rise despite the buys, the chances of its decline increase. When the jaw, the teeth and the lips are closed , the Alligator is tired or it is sleeping. What of lines of the indicator will be chosen as key for opening a position, and where Stop Loss will be placed, depends on risk level, comfortable for the trader. The Alligator uses a set of moving averages with different parameters of the shift.

Let us see the optimal settings to trade with the Alligator and Fractals indicators on the H1 timeframe, which allows us to trade intraday or hold trades for three days. As we use the Alligator momentum indicator alone, without any additional filters, the stop-loss orders should be placed beyond the local lows and highs, depending on the trend. Take Profit levels are set at the breakthrough of important high and lows. The above figure displays the hourly timeframes of the BRENT oil price chart.

Bill Williams: 3 lines of the Alligator Indicator

Bill Williams used pure imagination to explain the indicator. It’s enough of a fast glance at the indicator to understand what is happening in easymarkets forex broker review the market. When the indicator forms two highs above the zero level and the trough between them doesn’t plunge below 0, the signal is bearish.

The teeth is the 8-smoothed moving average that is moved five days into the future while the lips is the 5-period smoothed moving average that is moved by 3 bars into the future. Depending on where you think the pair’s price is heading, you may want to take a long or a short position. The alligator indicator will aid in identifying long or short signals . However, it should always be paired with other technical indicators and analysis to confirm any signals.

If the order is opposite – the green line is below the red one and the red line is below the blue one, and all three lines move down, there is a downward trend in the market. It means that you should look for an entry for selling and exclude buying. If the green line is above the red one and the red line is above the blue one, and all three lines move up, there is an upward trend in the market. It means that you should look for an entry for buying and exclude selling.

The default periods for the jaw, teeth, and lips periods are 13, 8, and 5. The other important numbers to look at are the shifts. The default shifts in the jaws, teeth, and lips are 8, 5, and 3. For a short signal, the same rules apply – but in reverse. Make sure your chart is set to display candles and then wait for the short signal, which is identified by the averages crossing downwards and widening . If it looks like the trend is set to continue, and a bearish engulfing candlestick occurs, this could be a signal to sell.

A fully developed trend

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The Alligator is sleeping.

Lines have to look to the south and be built in order AlligatorsJaw While the price moves under the green line the trend is descending. Lines have to be directed to the north and be built accurately in order AlligatorsLips While the price moves higher than green line the trend is bull. The return intersection of lines (The Alligator loses interest in «food») before a turn or consolidation is considered the moment of the closing of positions. Gradually lines are developed in a necessary order, the distance between them increases (the period of «hunting» opens).

He also described the trading strategy of the same name that uses the Alligator indicator. The periods, type of moving averages and parameters of shift correspond to Fibonacci’s number due to that steadily compensate the effect of mutual delay. The Williams Alligator is an excellent market analysis tool suitable for both a beginner in training and an experienced professional trader. Although the indicator was created a long time ago, it still works. To enter a trade based on the Alligator and Fractals, you need to wait until the Alligator wakes up.

That being said, this is a popular enough indicator that several other traders out there will be following it as well. Some traders won’t take profits until the green moving average has crossed all the way through both of the other a trader’s list of every trading styles moving averages, so that is something else to think about as well. In order to figure out what works best for you, it’s important to test in a demo account so that you get familiar with the advent flow of using this indicator.

The Teeth is the 8 smoothed moving average, which is smoothed by five bars on previous values. The Lips features the five bar smoothed moving average, which is smoothed even further by three bars on previous values. This will plot a green moving average, a red moving average, and a blue moving average. The Alligator strategy suggests trading in the trend direction and opening positions at the most profitable levels. In this strategy, the major tools are the Bill Williams indicators, the Alligator, and others, for example, Awesome Oscillator, Fractals. It depends on the timeframe where you use the Alligator in a trading platform.

Risking 1% of the initial deposit, we can afford to enter a trade of 0.45 lots. The ratio between profit and potential loss (Reward/Risk) was 2.59. The Alligator indicator was created by Bill Williams, an American trader, and psychologist. Williams described the Alligator indicator in his book ‘Trading Chaos’ in 1995.

FAQ Get answers to popular questions about the platform and trading conditions. When it sleeps for so long, the hungrier it becomes, and is ready to hunt for bulls and bears. Finally, you need to check where you want to apply these numbers. This can be either the close, open, high, low, median, weighted close, and typical close. We recommend that you use the default figures as shown below. IG International Limited is licensed to conduct investment business and digital asset business by the Bermuda Monetary Authority.

Once the lines have shown a direction, you can resort to using a price pattern that is a staple of all traders – pullbacks. ᏟᖴᎠs are complex instruments and come with a high risk of losing money rapidly due to leverage. 77.93% of retail investor accounts lose money when trading ᏟᖴᎠs with this provider. The same principles apply to the E-mini Dowjones futures. As you can see in June 2018 , there was a crossover of the green line to the upside indicating an uptrend and then an expansion of the line confirms the trend move.

In the hourly timeframe, I prefer using the following settings of the indicator 21;13;8, but I will cover it in detail later. In a downtrend, the lines are arranged in the opposite order. The jaw line is at the top, below is the teeth line, and the lip line is the lowest. As the downtrend develops, the distance between the balance lines is increasing.