Introducing the Alligator
This is a trend indicator developed by Bill Williams and it is being offered in the standard settings of each trading platform, like Metatrader or Jforex that can be found for free over the Internet. The alligator is pretty interesting because it looks like a set of different moving averages and its interpretation should be as such. However, instead of different moving averages, like MA20, 50 and so on, here we’re having the jaws, teeth and lips of the alligator.
How to Use the Alligator Indicator In Trading
The idea behind the indicator is that when price is trending the lips (the green line) of the alligator should be the first place where we should add to a position in the same direction as the main trend. The trend should be considered as being reversed or about to be reversed by the time the teeth and jaws are being broken. Therefore, after a bullish trend, as long as price is not breaking below the jaws of the alligator, we should still look to buy , while in a bearish trend we should still look to sell.
Alligator indicator is one of the most famous indicators that belong to Bill Williams and every trading platform is recognizing that. Because it is applied directly on the chart, it means it is a trend indicator and not an oscillator and this says much about the way trading can be done with it.
On the Metatrader trading platform, going on the upper menu on the “Insert” tab and then choosing “Indicators” will open a window with default indicators that are being offered by the Metatrader together with Trend, Oscillators, Volumes, Bill Williams and Custom indicators. Under the Bill Williams category, the Alligator is the second one in the list.
By clicking on it, a window is opening with the setups and characteristics of the three different parts of the Alligator indicator: jaws, teeth and lips periods. In fact, they represent nothing but some moving averages that are being calculated in a different way than the regular moving average. The Metatrader offers the possibility to choose what kind of method should be compiled as well, in the sense that all the three parts mentioned above can be calculated smoothed, simple, exponential, or under a linear weighted average.
Different colors can be chosen for each of the three averages, with blue for jaws, red for teeth and green for lips being the standard default scheme. By clicking the OK button, the indicator is placed on the screen, right over prices.
Identifying a Strong Trend
A strong trend is defined when price is above all three averages and not touching any one of them, with the “perfect order” for the three averages being when they are on top of each other, with no crosses happening. Of course that in a bullish trend one is looking to buy the dips in support levels, and in a bearish trend put options are being bought in resistance.
With the Alligator indicator, the support or resistance is being given by price testing one of the averages mentioned above: the bigger the average, the stronger the support and resistance area. In other words, support and resistance is clearly more difficult to be broken if price is breaking all the way to the blue average, the jaws.
One strategy for trading is first to choose the time frame and what expectations a trader has. For example, on a four hours chart, regardless of the financial product to be traded, it is recommended that the amount to be invested to be divided into three different parts. If the trend is bearish and all three averages are trending, then one put option should be traded when and if price is reaching one of the averages. Expiration date for such a time frame can go anywhere between end of week and even end of month, and this doesn’t mean that a trader should stay until end of week for the option to expire.
If, for example, the trade is taken on a Thursday, then the expiration date means only a couple of days or less. The same argument goes for the end of month expiration as well.
Applying Money Management
In this way we can apply money management and stay disciplined as trends, regardless of their nature, are also having corrective wave. The idea is to trade call or put options when these corrections are happening as rarely a second or a fourth wave in an impulsive move for example is exceeding the three averages.