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How to Increase Day Trading Profits Using Alligator Indicator (Forex & Stocks Strategies) - YouTube
Channel: The Secret Mindset
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If you are a fan of trading with moving averages
and unfamiliar with the alligator technical
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tool, get ready for an interesting strategy.
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The Alligator is trading indicator created
by famous trader Bill Williams, which, just
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like moving averages, is used to confirm ongoing
trends and their primary direction.
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In addition to identifying existing trends,
you can also use the alligator indicator to
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enter counter trend moves.
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Alligator is a trend-following tool which
follows the premise that financial markets
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and individual stocks trend just 15% to 30%
of the time while grinding through sideways
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ranges the other 70% to 85% of the time.
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The indicator has a funny name: it comes from
the head of an alligator.
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As part of it, there are three averages.
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Each average has a name related to an alligator’s
mouth: jaws, teeth and lips.
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The alligator analogy is designed to help
describe some of the behaviors of the market
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as it goes from non-trending to trending.
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The idea is that the absence of a trend in
the market — meaning periods of sideways
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movement — is like a sleeping alligator.
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Eventually the alligator wakens and the longer
it has slept, the hungrier will be — in
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other words, the more pronounced the trend
will be.
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I know this analogy might seem funny, but
don’t exit the video yet and let me explain
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further the usefulness of this indicator.
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Bill Williams was insistent that a successful
trader will know the structure of the market.
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In keeping with this line of thinking, the
Alligator indicator consists of three moving
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averages, each smoothed over different time-frames,
which he called 'balance lines'.
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By looking at the behavior of the balance
lines, we can determine the structure of the
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market — in other words, whether we are
dealing with a sleeping alligator or not.
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So Alligator uses three smoothed moving averages,
set at five, eight and 13 periods, which are
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all Fibonacci numbers.
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The three moving averages comprise the Jaw,
Teeth, and Lips of the Alligator, opening
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and closing in reaction to evolving trends
and trading ranges:
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Green moving average represents the lips of
the Alligator and is set to 5 and displaced
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into the future by 3 periods
Red moving average is the Alligator teeth
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and is set to 8 periods and is pushed 5 periods
into the future
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Blue represents the jaws of the Alligator
and is set to 13 periods and displaced 8 periods
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into the future
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Now, How to Use the Alligator Indicator in
Trading
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There are three key pieces of information
shown by the Alligator indicator: the absence
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of a trend, the formation of a trend, and
the direction of the trend.
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Let's discuss each of these, and see how we
can use them with Alligator indicator:
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First.
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The Absence of a Trend.
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This is a common state and it's indicated
by those times when the three lines of the
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Alligator indicator are close together or
intersected.
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We can see it in this example, where the green,
the red, and the blue lines all stick close
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together.
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This means that the alligator is dormant — and
that the market is not really doing anything,
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and that we are awaiting a change in state.
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So when the 3 lines are intersected, we do
not have a trend.
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This is generally a time of low volatility
and you may want to find another instrument
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to trade.
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Next.
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The Formation of a Trend
A successful awakening of the alligator is
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a crossover of the fast green line through
the slower lines, plus the slower lines following
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that direction, and all three lines spreading
apart.
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When the moving averages move wide apart like
in this example, the alligator is woke and
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eating.
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The longer the alligator has lain dormant,
the hungrier it is.
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I know is cringey, but think of a market that
is ranging… we know it will break out and
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the longer the range continues, the more violent
the breakout can be.
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These periods of persistent trends are when
the indicator tends to be more effective.
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So, the lips of the Alligator, the green line,
the fastest moving average, will be the first
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one you will want to monitor.
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You want to see the green line cross both
of the slower moving averages.
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You will also see the lips and the jaw start
to turn in the direction of the green line.
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As an entry point, many traders will enter
the market following a candle close above/below
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all 3 lines.
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Third phase.
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Direction of the Trend
The direction is indicated by the movement
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of the balance lines.
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The green line is our fastest moving average,
and we expect this to move first, followed
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by the red line, and then the blue line.
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The green line crossing above the slower lines
represents a buy signal.
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Crossing below represents a sell signal.
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If all three move higher and widen, it confirms
an uptrend.
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If the balance lines move downward and widen
after a sell signal, it confirms a downtrend.
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As the trend comes to an end, the balance
lines draw closer together.
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The fast green line crossing back over the
slower lines is the signal to take your profit.
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The key strength of the indicator is the way
that it helps you to stick with a persistent
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trend.
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One of the drawbacks is the difficulty in
successfully reading the opening signals in
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a timely manner.
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During sleeping period, when the lines are
closed and intersected, you will see many
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crossovers that look like trading signals.
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The trouble is the timing — because if the
indicator lags at the start of a down trend
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for example, and the fall was steep, you could
potentially miss the move.
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The classical way to use The Alligator is
to look for “the perfect order”.
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The three moving averages should NOT cross.
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When doing that, the perfect order forms.
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Moreover, this signals a strong trend.
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But this isn’t the only way to use it.
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Remember that this indicator shifts the moving
averages further in time.
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This shifting allows for a greater flexibility.
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In a way, it resembles the Ichimoku Cloud.
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Traders familiar with cloud strategies know
the cloud, or “kumo” is shifted on the
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right side of the chart!
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Therefore, future support and resistance levels
appear at the present time.
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A useful Alligator trading approach deals
with support and resistance levels.
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And these levels are NOT horizontal.
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You see, traders sometimes make a fatal mistake
believing that support and resistance can
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only be horizontal.
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But there are also dynamic levels.
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Dynamic support and resistance move along
with the price.
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Therefore, they offer more value.
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The three moving averages that make the Alligator
indicator do exactly that.
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They follow the price.
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If the price rises, the three lines follow.
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The bigger the distance between the lines,
the stronger the support and resistance area.
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The bigger the time frame, the more difficult
for the price to break through.
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In this way, the area between the first line
(the green one – lips) and the last one
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(the blue one – jaws) is dynamic support
or resistance.
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For example, in a bullish trend, it shows
support.
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In a downtrend, it show resistance.
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When the Alligator is feeding, watch for pullbacks
against the main trend direction and trade
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those moves with a pullback strategy.
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So here we have a bullish trend, with the
Alligator offering dynamic support.
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It starts from the green line and ends with
the blue line.
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The lips offer weak support.
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If bears push stronger, they might reach the
teeth.
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Jaws represent the final support.
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Any move beyond and the trend is in danger.
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Another useful Alligator approach consists
of analyzing the crossovers.
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That means, the crosses between the three
lines that make the indicator.
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A typical approach is to use the faster average
(the green line) for spotting fake crosses.
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When the green line crosses the red one and
then turns again without reaching the blue
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line, a fake move just forms.
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Hence, in a bullish trend, you can search
for long entries after this crossover.
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Or, in a bearish trend, go short when the
perfect order gets back in place.
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Probably you’re familiar with the golden
and death crosses concept.
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It calls for two big moving averages crossing.
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When the fast one moves above the slow one,
a golden cross forms.
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This is bullish.
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When a death cross appears, the opposite is
true.
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Bears are in control.
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The Alligator could offer a similar interpretation.
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The secret is to use the bigger averages in
the same way.
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Therefore, use the red and blue lines as the
faster and slower averages.
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A cross like this shows you the type of the
market: bullish or bearish.
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Furthermore, use the green line of the Alligator
indicator as a confirmation.
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Alligator indicator provides a useful visual
tool for trend recognition and trade entry
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timing, but it has limited usefulness during
choppy and trendless periods.
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Alternatively, you could try using a different
tool, such as a Momentum Indicator or a different
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oscillator to look for price/momentum divergence,
as a way of confirming your trading signal.
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