Alligator Indicator Explained

Definition of the Alligator Indicator

The Alligator indicator is a trend indicator which was created by Bill Williams and is thus classified as a Bill Williams indicator under the MT4 indicator suite. The indicator was created as a means to identify trend changes using the behaviour of each of the three components of this indicator. The indicator was discussed in Bill Williams’ book known as Trading Chaos.

Alligator

The Alligator is made up of the following components:

1) 13-day Simple Moving Average with a shift setting of 8 (blue colour)

2) 8-day Simple Moving Average with a shift setting of 5 (red colour)

3) 5-day Simple Moving Average with a shift setting of 3 (green colour)

The colours used in the moving average settings serve to distinguish them for clarity. This is one of the few indicators that employs a triple moving average in-built strategy.

Usage of Indicator
The alligator indicator can be used in the following ways:

  1. To trade the change in the trend of the asset as a result of the cross of the red SMA component of the alligator over the blue moving average component.
  2. The alligator can also be used in conjunction with other indicators, especially the momentum indicators, to detect the strength of the new price action.

Indicator Settings

The indicator is a Bill Williams indicator. To attach it to the chart, click on Insert -> Indicators -> Bill Williams. The settings shown above are the default settings for the indicator.

Alligator_onMT4

In terms of appearance, some modifications to the look of the indicator can be made. The moving average lines can be made thicker, and the shift can also be adjusted by any trader who discovers better need for such a function.

Once the alligator indicator has been attached to the chart, further edits of its properties can be done by calling up the indicator on the Indicator List (Ctrl + I). The indicator is a native indicator to the MT4 platform.

Usage of the Alligator in Forex Trading

How is the Alligator indicator used in trading forex?

a)Trend Identification

The fact that the Alligator contains three moving averages not only makes it suitable for determination of the trend, it also makes it suitable for use in trading on its own. This is one of the few indicators with this ability.

A typical Alligator trade involves watching out for a cross of the 5SMA (green) on the 8SMA (red), and the cross of both moving averages on the 13SMA (blue). If the cross is occurs in an upward direction, this is seen as a bullish signal. If the cross occurred southwards, this is seen as a bearish condition.

b) Trading With the AC Indicator

In keeping with Bill Williams’ practice of combining his indicators when trading, the Alligator can also be combined with the AC indicator as shown below. The essence of combining both is to get the trend-seeking power of a moving average indicator (Alligator) with the power of a momentum indicator (the Accelerator-Decelerator).

Long Trade

A typical long trade setup sees the Alligator’s red SMA crossing above the blue SMA when the AC indicator bars is green in colour. In order not to get a delayed signal, the colour of the AC indicator bars is taken into account wherever the bars are located: the bars do not have to be located above the zero line. Once the bars are green the long trade is taken. After the signals have aligned, allow the price action to retrace slightly to bounce off the red SMA. This is the point to take a long trade.

AC_alligator_long

Short Trade Entry
The short trade parameters are as follows:

  1. Red AC indicator bars, irrespective of location with respect to the zero line.
  2. Red SMA of the alligator crosses below the blue SMA, followed by candlesticks bouncing off the red SMA in a downward direction.

The short trade is taken at the bounce of price action off the red SMA.

AC_alligator_short

There are many ways that the Alligator can be used. Some of them are awaiting discovery by budding traders like you. Make sure you practice how to trade each setup on a demo account before using the indicator to trade real money. Also pay attention to risk management.

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