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The Alligator is an indicator developed by Bill Williams. 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.
The indicator consists of 3 moving averages which are offset towards the future:
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. This example is the alligator that alternates between the periods of sleep and hunting.
When the Jaw, the Teeth, and the Lips are intertwined, it means the Alligator is asleep and there’s no uptrend or downtrend at the market. Bill Williams recommends staying out of the market during such periods. The longer the Alligator sleeps, the hungrier it wakes. When it wakes up from a long sleep, it opens its mouth (moving averages diverge) and gets ready to take a big bite of the market. It’s time to trade! The Alligator will chase the price far away and offer a decent profit to a trader. Having eaten enough, the Alligator goes back to sleep (moving averages converge), so it's time to take profit.
If the Alligator is not asleep, the market is either in an uptrend or a downtrend.
The balance lines can provide resistance/support during the trend phase. The price can go beyond the green line for the short periods of time. The more it tries to break the green line, the weaker the trend becomes.
It’s also possible to look for the so-called “fake crosses” or the situations when the green line crosses the red line but then turns back. If such cross happened during an uptrend, you can buy once the green line returns above the red one.
There may be many different combinations between Alligator and other tools of technical analysis. Here are some suggestions.
Conclusion
The Alligator indicator has a unique formula that distinguishes it from a simple set of moving averages. 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.
