The indicator of the Alligator, authored by the well-known trader Bill Williams, became popular after the publication of two books "Trading Chaos" and "New Dimensions in the Exchange Trade," there you will find the most complete description (in connection with the author's vocabulary is not the best).
It is generally accepted that the majority of the time (70-80%) markets are in the state of a trading range or rang, prices at that time fluctuate within certain limits, and only in 20-30% of the time there are really trend movements that are most favorable for profit, because the price change at this time has a clearly expressed directional character.
Alligator indicator is just a very interesting approach to assess the direction of the market and filter the periods of absence of the trend (the side range). Its main goal is to give you the signal of an emerging trend.
Formula of Alligator
The alligator is a simple combination of 3 ordinary moving averages of different lengths and with different forward shifts.
All moving averages in the indicator Alligator use not the closing price, but the median price.
Median Price = (High + Low) / 2
Where:
High - the maximum of this bar (candles) ;
Low - the minimum of this bar (candles) ;
Moving Average 1, called in Bill Williams's The Jawbone Jaw is the Balance Line for the time period that was used to plot the chart. The line is a 13-period moving average, shifted on the chart by 8 bars ahead; It is usually depicted in blue.
Alligators Jaw = Smma (Median Price, 13, 8)
Where Smma - smoothed moving average (Smoothed Moving Average, SMMA)
moving average 2 Bill Williams called "teeth Alligator" - a line balance for a significant time period in order below. The line is an 8-period moving average, shifted on the chart by 5 bars into the future. Usually red.
Alligators teeth = Smma (Median Price, 8, 5)
Moving Average 3 is called in Bill Williams's "Lips of the Alligator" - this is the Balance Line for a significant time period, which is lower by another order than the Line is a 5-period moving average shifted on the chart by 3 bars ahead. Green Line.
Alligators Lips = Smma (Median Price, 5, 3)
The formula of the smoothed moving average used to calculate the indicator of the alligator.
The first value of the smoothed moving average is calculated, as well as the simple moving average, only the closing prices, but the median prices (the formula of which is indicated above ) are summed up.
The second and subsequent moving averages are calculated using the following formula:
Smma i = (Sum 1 - Smma i-1 + Median Price i) / N
Where:
Smma i is the smoothed moving average of the current bar (except the first);
Sum 1 - the sum of Median Price prices for N periods, measured from the previous bar;
Smma i-1 - smoothed moving average of the previous bar;
Median Pricei is the median price of the current bar;
N is the period.
Example of Alligator:
Description of the indicator Alligator:
As it became clear, the Alligator indicator is a usual combination of three smoothed moving averages with different periods (13, 8 and 5) and different biases (8, 5 and 3 respectively), built not at the closing price but at the median price. Each of these moving averages by the author (Bilu Williams) has its own "crocodile" name.
The longest moving average - the "Alligator Jaw" (with period 13 and offset 8) shows the price level, which should be established 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 "Balance Line". It is believed that if the price is higher than the "Alligator Jaw" - then the market positively assesses the new factors and will continue to move up. Conversely, if the price is below the Alligator's Jaw, the market negatively assesses the new factors and will continue to move down.
Moving averages with a smaller period are estimated exactly the same, but refer to a shorter period.
Bill Williams himself described these lines in a very peculiar way, so sometimes he needs comments to understand his theory. Moving averages he called the Balance Lines and said that if all the moving averages are intertwined, then the Alligator sleeps, and the longer he sleeps, the hungrier it becomes. This has its own logic, and it is consistent with some concepts of technical analysis. In this case, a long "interlacing" of moving averages means nothing more than a long-term consolidation or a narrow trading range.
Williams points out that when the Alligatorwakes up after a long sleep, he is very hungry and begins to hunt for the price until he is satisfied. This is something other than a breakout of the trading range, which is usually the stronger, the longer and there was the previous consolidation and the lower it was in height.
Williams points out that after the Alligator is full, he begins to lose interest in food, the moving averages begin to converge. This is nothing more than a new consolidation after a rapid trend. At this time and according to his theory, according to the general concept of technical analysis, the trader must close his positions and wait for the new trend to begin.
How to use Alligator indicator?
One of the biggest pluses of the Alligator indicator is that it avoids the ambiguous interpretation of most signals.
- The Alligator indicator can be used to determine how strong the subsequent movement in the market will be. This, as a rule, can be determined by the time that the lines of moving averages are in the intertwined state. The more this time, the more, as a rule, the subsequent trend movement. However, the use of moving averages like Alligator is not the best method. An alternative to this is to monitor any measure of volatility, for example standard deviation (standard deviation), or indicators based on these indicators, for example Bollinger Bands.
- Signals preparing to enter the market. If during the trading period the amplitude of the moving average fluctuations starts to increase and the space between the lines grows slightly, it means that, most likely, a new trend begins, the direction of which will show the first appeared fractal. After the appearance of the first fractal, you can start preparing for trading.
- For signals entering the market, the Alligator indicator is usually not used in its pure form. Usually, the signal for buying is the movement of the alligator lines up and the market penetration of the fractal pointing upwards. Purchase is carried out either at the fractal level, or slightly higher. In this case, the fractal must be higher than all three moving averages. The sell signal is the reverse one, i.e. the movement of the alligator lines down and the penetration by the market of a fractal, directed down, while the fractal should be below the sliding ones. Sometimes to confirm the signal, another fractal is waiting, which should be higher (for a purchase transaction) or lower (for a sale transaction) of the previous fractal, respectively.
- To add to an existing position. Adding a volume to an existing position occurs if the situation of the previous rule remains, and the next fractal appears next to the previous one.
- To determine the trend. If the moving average with a period of 13 ( Alligator Jaws ) is the most distant from the price bars, the 8-period moving average ( Alligator's teeth ) is between the 13- and 5-period moving averages, and the last 5-period moving average ( Alligator Lips ) is the closest to the price schedule, then the market starts a trend. The further these lines are from each other, the stronger the trend. The trend ends if the moving averages begin to intersect with prices and among themselves.
- To set the stop. As the level of stop orders when trading on a trend, use the 13-period moving average 1 - "Jaws of the Alligator". However, depending on what risk the trader is going to bear, he can use any of these lines as the Stop loss level . Setting a stop on the longest line (13-period, blue) increases the risk of losses, since by the time this line reaches the price, the trader may already be at a loss. Setting a stop on the fastest line (5-period, green) leads to the fact that the trader will close the position at the slightest signs of the end of the trend, which means that he can miss the greater part of the trend and not get profit.
- Sometimes the derivatives of the Alligator indicator are used, for example, the oscillator Gator, Awesome Oscillator, Accelerator.
Disadvantages of the indicator Alligator:
Like all indicators built on the moving average system, the alligator lags in its signal about the beginning of the trend formation and gives at this point a lot of false signals