The Alligator indicator is a great Forex trading tool that has been fascinating traders for a long time. While not a moving average, riding trends is its main quality. This article shows how to use the Alligator indicator in Forex in a profitable trading way.
Although it has a funny name, the indicator shows the power of bulls or bears to reverse a trend. It adapts mostly to a trending strategy, but it’s famous for calling reversals too. For this reason, the indicator is popular among Forex traders, trend followers or contrarians.
This is one of Bill Williams’ famous indicators. Together with Fractal, Gator or the Awesome oscillator, the Alligator Forex strategy is unique in every way. It is part of a special group of indicators. Trading platforms, MetaTrader included, offer the Bill Williams indicators separate from classical trend indicators or oscillators.
All traders face a dilemma: to use trend indicators or oscillators for their analysis? There’s no right or wrong answer to this, as both have pros and cons. However, one can use both.
Regardless of whether it is part of an individual trading system or not, the Alligator indicator shows the right side of the market. Traders use it to find a bullish or bearish market, support or resistance levels, confluence areas, etc.
Table of Contents
- 0.1 Introducing the Alligator Indicator
- 0.2 Applying the Alligator on a Chart
- 0.3 Alligator Indicator Standard Interpretation
- 1 How to Use Alligator Indicator in Forex
- 2 Conclusion
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Introducing the Alligator Indicator
The indicator has a funny name: it comes from the head of an alligator. As part of it, there are three averages. Each average has a name related to an alligator’s mouth: jaws, teeth and lips.
A trading system based on moving averages plots multiple averages on a chart. The same here. Any Forex Alligator strategy contains three averages, with the above names. Any average has a period that it relates to. For the Alligator, these are the 13, 8 and 5 periods for jaws, teeth, and lips, respectively.
All three averages combine the power of the Alligator indicator. One can choose the average type (smoothed, simple, exponential, linear weighted) and the price to apply it to. When either closing or opening price, a median one or not, multiple settings exist.
What makes this indicator unique is the ability to shift the averages. In fact, with the default settings, the averages shift, leaving a bit of room from the current price until the Alligator Forex indicator.
Applying the Alligator on a Chart
We will use the MetaTrader trading platform to show how to apply it on a chart. However, any trading platform offers it, so the principle is the same. From the Insert/Indicators/Bill Williams path, choose the Alligator indicator.
The result is a pop-up window like the one above giving you customized possibilities. To use it like Bill Williams intended, just leave it with the default settings. Anything is editable, though: colors, levels, etc.
The three averages plotted on the chart reflect the time frame you use. If the Williams Alligator indicator is set on the daily chart, the jaws consider 13 days, teeth 8 and lips 5, respectively.
The jaws’ line comes in blue, teeth in red and lips in lime, but this is just a setting. You can change/edit the indicator in any way you like, as long you’re using it properly. For that, the following information is crucial.
Alligator Indicator Standard Interpretation
When using it, think of a system that follows price. No matter where the price goes, the Alligator goes. These averages closely follow price and keep traders on the trend. Because of that, missing a trend is virtually impossible.
The classical way to use it is to look for “the perfect order”. The three elements should NOT cross. When doing that, the perfect order forms. Moreover, this signals a strong trend. We all know the saying: “trend is your friend”. Hence, you don’t want to fade the perfect order. The bigger the time frame, the stronger the trend. What can go wrong?
Many things can.
Firstly, the price moves aggressively below the green line (lips). This is not scary if it is the first attempt. The more the price tries, the weaker the trend becomes.
In a bullish trend, it shows bulls lose steam. Also, they might become wannabe bears. Trading with the Forex Alligator indicator gives two choices: follow the trend and spot the reversal.
Secondly, look for the perfect order to break. This is a bearish sign in a bullish trend. You don’t want to fade this move if you care about your trade.
In short, trading with the Alligator indicator is easy. Stay long when the price is above it, and short when it is below. The perfect order is a plus.
How to Use Alligator Indicator in Forex
The perfect order is just one Alligator indicator strategy. It mainly deals with spotting the right trend. And sticking to it. However, Bill Williams designed it for other purposes too. Keep in mind that it shifts the averages further in time.
This shifting allows for greater flexibility. In a way, it resembles the Ichimoku Cloud. Traders familiar with cloud strategies know the cloud, or “kumo” is shifted. That is, on the right side of the chart, obviously! Therefore, future support and resistance levels appear at present time.
With the cloud, the price is in a state of equilibrium. It finds a balance between historical and future levels. These shift backward and forward twenty-six periods. Hence, shifting is not a new concept. Bill Williams sensed its power and used it with the Alligator indicator.
Dynamic Support and Resistance with the Alligator Indicator
A wonderful Alligator indicator trading system deals with support and resistance levels. Moreover, levels are NOT horizontal. You see, traders sometimes make a fatal mistake. They believe support and resistance can only be horizontal.
While this happens (most of the time), there’s more to it. How about dynamic levels? As a rule of thumb, dynamic support and resistance move along with the price. Therefore, they offer more value.
The three lines that make the Alligator Forex indicator (jaws, teeth, and lips) do exactly that. They follow the price. If the price rises, the three lines follow. If the price falls, they fall too. The bigger the distance between the lines, the stronger the support and resistance area. The bigger the time frame, the more difficult for the price to break through.
In this way, the area between the first line (the green one – lips) and the last one (the blue one – jaws) is dynamic support or resistance. For example, in a bullish trend, it shows support.
The chart above is the EUR/USD hourly time frame in a bullish trend. Note the Alligator indicator MT4 support on it. It starts from the green line and ends with the blue line. The lips offer weak support. If bears push stronger, they might reach the teeth. Jaws represent the final support. Any move beyond and bulls end up in the Alligator’s stomach.
Trading is fun if a logical approach governs it. Decisions to buy or sell should come at support or resistance. For this reason, the Alligator indicator formula is a great tool for traders.
Trend Reversals with the Alligator
Because the Alligator technical indicator shows a trend, it doesn’t mean reversals miss when analyzing the market. In fact, they go hand in hand.
First, one needs to look for a reversal pattern. This can be a double top or bottom, a head and shoulders pattern or a triangle. Or, it can be one of the Japanese candlestick techniques. The Japanese were masters in spotting reversals. As such, most of their techniques deal with trend reversal approaches.
After a possible trend reversal pattern appears, don’t go long or short. Use the Alligator indicator Forex platforms provide as confirmation. After all, you don’t want to get caught in a fake pattern.
What is the confirmation then? This is very simple: wait for the lips (Alligator’s green line) to cross above the other two “sister lines”. The result is one of the best approaches of how to use the Alligator indicator in Forex.
Especially relevant is this system when used with a Japanese candlestick pattern technique. The above chart shows a morning star pattern on the hourly EUR/USD chart. Because it follows a bearish trend, it’s a bullish reversal pattern. Moreover, a morning star is perhaps the most powerful bullish reversal pattern ever!
But we don’t have to go blindly in a trade. Confirmation protects a trading account. Hence, look for trend reversal’s confirmation. The Alligator Forex indicator is the perfect tool for that.
Probably as important as the reversal pattern is its confirmation. Without it, traders end up going long, in this case, only to find out that the market comes for their stop. There’s nothing more frustrating than that.
Look for Fake Crosses
Another great Alligator Forex trading system consists of interpreting the crosses. That means, the crosses between the three lines that make the indicator. They can’t be all correct, right? How about spotting the fake ones?
A typical approach is to use the faster average (the green line) for spotting fake crosses. Therefore, eyes on the green and red lines, please! When the green line crosses the red one and then turns again without reaching the blue line, a fake move just forms.
Hence, in a bullish trend, go long on such a cross. Or, in a bearish trend, go short when the perfect order gets back in place. Trading doesn’t have to be complicated. Keep things simple and logical and profits will come to you.
One example of a bearish cross in the chart above shows plenty of further downside potential. The fake cross was nothing but an opportunity to use what the Alligator Forex platforms offer. And there are more of them.
A similar fake cross is possible between the bigger averages: the blue and the red lines. In fact, such a cross is more powerful. It is only normal, as the two lines consider more periods before plotting an actual value.
The time frame matters here too. Not for the actual cross, but for setting the right take-profit level. When a signal as described here appears, consider the time frame before setting the take-profit level.
If you use the five-minute chart and a fake cross signal appears, don’t set a hundred pips take-profit level. Do that if the signal comes from the daily chart, for example. This way, you adjust your expectations with the time frame used. While it seems logical, most traders fail to recognize the time frame’s importance.
Use Different Crosses
Probably you’re familiar with the golden and death crosses concept. It calls for two big moving averages crossing. When the fast one moves above the slow one, a golden cross forms. This is bullish. When a death cross appears, the opposite is true. Bears are in control.
This Alligator indicator trading system offers a similar interpretation. The secret is to use the bigger averages in the same way. Therefore, use the red and blue lines as the faster and slower averages. Just like in the case of a golden or death cross.
A cross like this shows you the type of the market: bullish or bearish. Of course, in a bullish market, we want to buy. In a bearish market, shorting a Forex pair works best.
Furthermore, use the green line of the Alligator indicator as a confirmation. If the golden cross, for example, forms and the lines are in perfect order you’re good to go long. If not, think twice. The opposite is true when a death cross forms.
The EUR/USD chart below shows two crosses. One bearish and one bullish. Both are great signals to take with the Forex Alligator indicator. Again, simple things work best in technical analysis.
Make the Most of the Shifting Attributes
Just like a displaced moving average shifts on the right side of a chart, the Alligator indicator does that too. This is a powerful tool in the hands of Forex traders. Being able to predict FUTURE support/resistance levels is valuable information.
Stop for a minute and think of how this indicator functions. The lips, teeth and jaws appear on a chart on the right side of the actual price. However, this is obvious only if you look at the current price. If you look back in time, you’re missing the point if don’t know how the Alligator technical indicator works.
Let’s assume you plot the indicator on a daily chart. The currency pair is irrelevant. Before backtesting a strategy, take a look at the current price. You’ll see the blue line (jaws) standing 8 periods on the current price’s right side. That is the support level eight days from now! The same with the other two lines: five days for the teeth and three days for the lips.
This is very important as traders forget this small detail. When backtesting, the entry signal is EARLIER than the respective candle. Depending on the line that gives the signal, it is three, five or eight periods earlier. Or candles.
Such a small detail may or may not change the entry. However, it brings a whole new perspective to trading with any Alligator indicator strategy. If your entry place considers the Alligator, you must shift it earlier with the corresponding value.
The same thing happens with displaced moving averages. If you test a strategy back in time and don’t consider the shift, the results are subject to interpretation. This is how powerful the Alligator indicator can be. Confirming trending moves with the Alligator could put you in a trend that might exceed your expectations.
The Alligator indicator shows a trending environment. This is the main characteristic. However, one can use moving averages instead and have the same result. A displaced moving average even has the shifting attributes incorporated.
Still, the Alligator indicator formula is unique in every way. Above all, it’s a system, not an indicator. It has multiple uses, not only one. And, it has one great advantage: it’s visible.
This means traders cannot go wrong if they respect the Alligator Forex trading system. Both trend-following strategies and reversal ones perform better when the Alligator indicator validates an entry. Furthermore, the indicator tells much about the strength of a support or resistance level. You’ll know from the start if the support or resistance has a chance to hold or not.
Therefore, you’ll know if it is worth buying the dip/selling the spike or not. Again, the bigger the distance between the three lines, the stronger the dynamic support or resistance level is.
This is not the only indicator Bill Williams is famous for. There are plenty more. However, it has a big advantage: it doesn’t repaint. When an indicator repaints, its values change together with future prices.
For example, the Fractals indicator disappears from the screen when price invalidates it. This is repainting. Not that is not useful, but it’s misleading. With the Alligator indicator, there’s no such thing.
The few trading strategies listed here are meant to show the flexibility of the Alligator indicator formula. One can edit it or keep it as is, the outcome is the same: great trades result from its correct interpretation.
To sum up, this article shows how to use the Alligator indicator in the best possible ways. Probably the most powerful tool ever developed by Bill Williams, the Alligator indicator offers great value.
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