One of the most peculiar trading strategies to date is Bill Williams Alligator Indicator. It describes the market activity, connecting it to the behavior of an alligator. For example, as the reptile awakes, it’s hungry, so it will be hunting a suitable meal. In the same way, the price-hunting process begins.
Another example is that the longer the market is quiet (read sleeping), just as the reptile, the bigger the next move will be (read the hungrier it will wake up).
It’s a very interesting strategy to research, not only to use, but you have to understand what exactly it is.
What the Alligator Indicator Is and How to Use It
This is a trend indicator created by Bill Williams that contains three lines related to an alligator’s jaw, teeth, and lips. The lines have different colors:
- The jaw is represented with a blue line and shows 13-period Simple Moving Average (SMA);
- The teeth are represented with a red line and show 8-period SMA;
- The lips are represented with a green line and show 5-period SMA.
Using some platforms, you can actually see the indicator right on the monitor. If yours doesn’t but you want to test the strategy, recreate the graph by placing lines with 8-, 5-, and 3-bar difference.
This indicator helps to recognize trends and their direction. You can see when the market is going up, how strong the move will be, and more. There are patterns using which traders determine those trends:
- If the price is about to go up, the alligator mouth will be placed in the correct order: jaws bottom, teeth middle, lips top;
- If it’s about to go down, the alligator is full and rolls on its back (to go to sleep, apparently). So, the order of the lines will be the blue bottom, red middle, green top.
Continuing the lying down topic, it’s easy to understand that if the price is going upwards, the alligator is also looking upwards (because it’s on its belly).
In case the lines are in the wrong order or seem random, twisting every now and then, it means the reptile is full and resting, its mouth is closed. If you see no trend, it means the market is ranging and resting, and so should you, withholding from opening trades until the alligator wakes up again.
This strategy is vastly used in Forex trading and explained in multiple papers connected to Forex (page 44 and onward). It’s fairly easy to understand if you know the major trends and can build a graph yourself.
There are plenty of trading strategies that change with time. The market doesn’t give time for rest; it’s always changing, some facts and strategies become irrelevant, and some are yet to be discovered. Bill Williams Alligator Indicator is by far one of the most interesting and peculiar strategies. It might be difficult to calculate it at first, but there are a lot of sources online that will help you with that.
