How to Use the Alligator Indicator in Forex Trading

To get the infinox leverages formula, you must first determine the median price of each candlestick, which is calculated as (high price + low price) / 2. Overall, the indicator is easy to understand as illustrated in the above article. A number of trading strategies can be devised using the Alligator indicator. It is not surprising that the indicator is such a popular trading system among traders. After prices reach the top end of the uptrend, you can see that they promptly reversed direction. Here, for a brief period, the Alligator sleeps but wakes up soon enough to feed on the new downtrend that has been forming.

It consists of three lines, overlaid on a pricing chart, that represent the jaw, the teeth and the lips of the beast. This indicator was created to help traders to confirm the presence of a trend and its direction. Our traders may also need another article about „What is Forex trading and how does it work“. First, make sure your EUR/USD chart is set to display candles and that you are familiar with engulfing candlesticks. Then, wait for the long signal – identified by all three moving averages sloping upwards, in parallel. If the trend continues and a bullish engulfing candlestick occurs, this could be a signal to buy.

How to interpret Alligator indicator

EneX signal is suitable for investors who believe in trend following strategy . Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. His focus is on the technical side of trading filtering in a macro overview and credits a handful of traders bill williams alligator that have heavily influenced his relaxed approach to trading. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

When the price breaks this line, it usually means that the trend is reversing in the opposite direction. It is used to identify entry points to slow trends or in conservative trading strategies where traders prefer to trade only in the strongest zones. Jaw is a 13-period smoothed moving average that is shifted 8 bars into the future.

How to set up the alligator indicator in MetaTrader 4

The Alligator indicator allows traders to trade both the ranging and the trending markets. However, it is more recommended to trade the trends rather than the ranges because profits can be easily built up in a trending market. Bill Williams is a well-known trader in the world of forex and futures and stocks. He is also an analyst and has done some extensive research in the markets. Williams’ main point was that the markets are unpredictable. This formed the basis of his creation of various technical indicators.

The longer the Alligator sleeps, the hungrier it may be when it awakes. “Displaced” means that the reading is adjusted X bars into the future which is believed to better forecasts future trend direction. For an uptrend, the counter-trendline is placed across the highs of the pullback, so an upward breakout is a signal to go long. In this situation, a price crossover is a great way to get into the market in the direction of the trend. Conversely, in a downtrend, pullbacks move upward and usually end at resistance levels. Since the Alligator indicator can show when a trend is forming, you can use it to trade a breakout strategy.

IG accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk.

• But be mindful of the chewing movements that bring the lips close to the teeth — they may present the best opportunities to enter a trade at this phase.
• Our traders may also need another article about „What is Forex trading and how does it work“.
• When the green and red line pull away from the blue line, Alligator opens its mouth and starts eating.
• This exposes a significant drawback of the indicator because many awakening signals within large rangeswill fail, triggering whipsaws.

You will notice that the volatility calculator forex is nothing but a combination of three different smoothed moving averages each having its own shift into the future periods. The direction is indicated by the movement of the balance lines. As the green line is our fastest moving average, we expect this to move first, followed by the red line and then, finally, the blue line.

How to Read the Williams Alligator

But be mindful of the chewing movements that bring the lips close to the teeth — they may present the best opportunities to enter a trade at this phase. Bill Williams used the different parts of an alligator’s mouth to describe the three moving averages. Moving average convergence/divergence is a momentum indicator that shows the relationship between two moving averages of a security’s price. It uses three moving averages, set at five, eight, and 13 periods. The three moving averages comprise the Jaw, Teeth, and Lips of the Alligator. As you can see in June 2018 , there was a crossover of the green line to the upside indicating an uptrend and then an expansion of the line confirms the trend move.

When the green and the red line are crossing to the upside, this is a bullish alligator – consider making long trades. Before you start using the indicator to search for trend changes, you should remember that 70-80% of the time, the market is moving sideways. If you have an interest in financial trading, you must have knowledge of two concepts, moving averages and volume…. The indicator provides signals when the three lines – Jaw, Teeth, and Lips meet and separate.

Calculation of the Alligator Indicator

The Williams Alligator Indicator is a technical analysis tool that is used to identify and gauge the strength of a trend. It provides signals when a new trend is in motion and also tells you when there is no trend. Alligator is a momentum-based indicator, the main ability of this indicator is to determine market trend and its direction. Remember, forex is a volatile market and a currency pair can experience a price movement of several pips in a very short period of time.

How does an Alligator work?

Since 2013 I have helped thousands of traders to take their trading to the next level. In conclusion, the Bill Williams’ Alligator indicator is one of the simplest trading indicators that also works as a technical trading system. The main purpose of the Alligator indicator is to keep trading simple.

There is no trend in the market

The alligator indicator was developed by Bill Williams in 1995. The name comes due to the fact that the indicator looks like an alligator’s jaws. When the green line starts to cross, the alligator is getting hungry and ready to eat – this is when you should search for a trading opportunity.

The tooth line is an 8-period SMA that travels five bars into the future. The way the indicator works can be explained using the following analogy. When the alligator’s jaw, teeth, and lips are closed , it means it is tired or sleeping. This is when many traders avoid taking a position because the trend is too weak. Alligator’s Lips – 5-period smoothed moving average which is moved 3 bars into the future. Alligator’s Teeth – 8-period smoothed moving average which is moved 5 bars into the future.

It would be a good idea to set a stop within your comfortable parameters of loss – below the low of the engulfing candle. 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.

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 it comes to Bill Williams, it was a contrarian approach. Williams’ view of technical analysis was to look at the current behavior of the markets.

In other words, the Alligator is sleeping and waiting for alterations in market conditions. Trend indicators attempt to signpost those key times when a trend may be forming. The Alligator Indicator – devised by US trader Bill Williams – is designed to identify when a trend may be forming and what the direction of that trend is. The red line follows, to confirm a breakout in a new direction. The Alligator lagged, but confirmed the signal after a candle closed below the three-line set. A simple script in order to plot the Alligator Indicator with triangles plotted on the graph in order to see directly if the alligator is sleeping or eating.