Bill Williams introduced the Alligator index in 1995. And as the term “Alligator” means not only an indicator, but also a metaphor. It consists of three overlapping lines on the price chart depicting the jaw, teeth and mouth of the beast. The indicator was created to help the trader confirm the trend and its direction. The alligator indicator can also help investors identify corrective pulses and wave shapes, but this tool works best when combined with a momentum indicator.
“Devils” crocodile are numerous. If the three lines are tied together, the mouth closes and indicates that it is asleep. During sleep, he becomes more and more hungry from minute to minute. When the trend takes shape, the crocodile wakes up and begins to eat. Filled, closes mouth again and falls asleep.
Alligator indicator – Formula
This indicator type is widely used in metatrader4 trading program, a the order of the calculation formula includes the following simple steps:
1) Alligator jaw, “blue” feature, is smoothed MMA at intervals of 13, moved up by 8 strips;
2) “Alligator teeth”, “red” line, is 8-period smoothed MMA, moved to 5 bars on top;
3) Alligator Lips, a “green” feature, is a 5-period smoothed MMA moved to 3 bars at the top.
The weakness of the indicator is that the time may be delayed due to its future positioning, which is the reason for adding the indicator to the rate of waiting for the signal.
Alligator indicator helps the trader stay in position for a longer period and works better than a longer sleep period. In the example above, you should stay in the trade until the candle closes above the middle red line. Williams has also developed a Gator histogram to visually facilitate interpretation, and many other traders have added their own “turnover” to improve the reliability of this indicator.
How to use
Key reference points are where lines intersect when they are “open” and when red and green lines intersect. The woven alligator is believed to be asleep. It’s about patience. When the lines are separated, the alligator eats them. Continue trading until the candles above or below the alligator. When lines converge or intersect, it’s time to think about entering or exiting, although the momentum indicator will determine the best starting point. Traders also pay attention to the closing of candles. In the example above, the output signal appears when the candle closes above the middle red line or alligator teeth. For this reason, during the second Alligator Trend will delay your trading a little longer to get a bigger profit.
Summary
Like any technical indicator, an alligator chart will never be 100% correct. There may be false signals, but positive signals are consistent enough to give a Forex trader an edge. The ability to interpret and understand alligator signals should evolve over time, and it is always recommended that you supplement the Alligator tool with another price indicator or model to further confirm possible trend changes.
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