The Alligator trading indicator is a very well-known and useful indicator, which, if used correctly, can serve as a very good assistant to the trader. This indicator is included in the assembly of the latest versions of MT4. You can also download and install it on our website in the Indicators section.
The author and creator of the Alligator indicator is Bill Williams, a well-known exchange trader and author of many publications on foreign exchange trading. The most famous works of Williams are considered to be his books "Trading Chaos" and "New Dimensions in Exchange Trading."
The Alligator indicator is based on the principle and generally accepted assertion that the vast majority of the time, markets are in a trading range, that is, they fluctuate in a certain range and boundaries. It is generally accepted that markets are in this state for about 80% of the time. The remaining 20% of the time shows really pronounced trend movements, which are especially favourable for scoring profits. This technical indicator was created specifically to identify such movements and inform the trader about the emergence of trends.
Visually on the chart, the Alligator looks like a combination of three moving averages of different lengths and with a different shift forward. All moving averages in the Alligator indicator do not use the closing price, but the median price. These three lines received simple and interesting names from the author: "Jaws", "Teeth" and "Lips". Each of these lines is calculated using the formula Median Price = (High + Low) / 2, where High is the maximum of this bar (candle), and Low is the minimum of this bar (candle).
Alligator's Jaws (blue line)
This is the Balance Line for the time period that was used to build the chart. The line is a 13-period moving average shifted forward on the chart by 8 bars; Usually shown in blue.
Alligators Jaws = Smma (Median Price, 13, 8), where Smma is the Smoothed Moving Average (SMMA).
The Alligator's jaw shows the price level that should be set in the market if it is not influenced by new factors. It is like a long-term analogue of a fair market price. That is why the author called it the "Line of Balance." It is believed that if the price is above the "Alligator Jaw", then the market positively evaluates new factors and will continue to move up. On the contrary, if the price is below the "Alligator Jaw", then the market negatively assesses new factors and will continue to move down.
Alligator's Teeth (red line)
This is the Balance Line for a significant time period an order of magnitude lower. The line is an 8-period moving average shifted on the chart by 5 bars into the future.
Teeth = Smma (Median Price, 8, 5).
Alligator's Lips (green line)
This is the Balance Line for a significant time period, which is one order lower than the Line is a 5-period moving average shifted forward by 3 bars on the chart.
Alligators Lips = Smma (Median Price, 5, 3).
"Teeth" and "Lips" are evaluated and give signals just like the "Jaws", but refer to a shorter period.
The author of the indicator, Bill Williams, described these lines in a very peculiar way, so sometimes clarifications are needed to understand his theory.
He called the Moving Averages Balance Lines and said that if all the moving averages are intertwined, then the Alligator sleeps, and the longer he sleeps, the more hungry he becomes. This has its own logic, and it is consistent with some concepts of technical analysis. In this case, a long "interweaving" of moving averages means nothing more than a long consolidation or a narrow trading range.
Williams points out that when the Alligator wakes up after a long sleep, it is very hungry and begins to hunt for the price until he is full. This is something else than a breakthrough of the trading range, which is usually the stronger the longer the previous consolidation was and the smaller it was in height.
In the opposite case, after the Alligator thoroughly ate, it begins to lose interest in food, moving averages begin to converge. This is nothing but a new consolidation after a fast trend. At this time and according to his theory, in accordance with the general concept of technical analysis, a trader should close his positions and wait for a new trend to begin.
This indicator serves as a very useful tool for determining trend movements. On its basis or in combination with other technical analysis tools, various trading strategies are built, with strict observance of which you can get excellent trading results.
Download the Williams Alligator indicator from the button below
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