Ever feel like you’re chasing trends that never became a reality? Or perhaps you’ve been caught in a consolidation phase, waiting for a breakout that never happens? You’re not alone. Many traders struggle to identify when the market is trending and when it’s in a pause. That’s where technical indicators come in handy. One such tool, developed by the legendary trader Bill Williams, is the Williams Alligator Indicator.
Now, I know what you’re thinking: An Alligator? Really? Yes, and it’s more than just a catchy name. The Williams Alligator Indicator is a trend-following tool that helps traders identify the market direction and avoid those frustrating sideways markets. By the end of this article, you’ll know exactly how to use alligator indicator strategies, how to combine them with other strategies, and most importantly, how to profit from them.
Ready to tame the Alligator? Let’s dive in.
What Is the Williams Alligator Indicator?
The Williams Alligator Indicator is a tool designed to help traders identify the start and end of market trends. It does this by using three smoothed moving averages (we’ll get more into the specifics later). The key idea here is that markets alternate between trending and consolidating phases. The Alligator Indicator helps you spot these phases and act accordingly.
And why an “Alligator”? Well, think of the market like a big, lazy alligator. When it’s sleeping, the market is in a sideways consolidation phase. When it wakes up, the Alligator starts hunting — that’s when a new trend begins. And when it’s fully awake and feeding, the market is in a strong trend. Simple, right?
The Alligator Indicator was created by Bill Williams, a trader, author, and technical analyst who’s known for blending trading with Chaos Theory. Williams developed the Alligator in the 1990s as part of his broader trading system, which aimed to help traders identify market inefficiencies and capitalize on them. Since then, it’s become widely used by traders across different markets — from stocks to forex and everything in between.
How the Williams Alligator Indicator Works
So, how does this Alligator work? Let’s break it down.
The Alligator Indicator is made up of three key moving averages:
1. Jaw (Blue Line): This is the 13-period Smoothed Moving Average (SMA), shifted forward by 8 bars.
2. Teeth (Red Line): The 8-period Smoothed Moving Average, shifted forward by 5 bars.
3. Lips (Green Line): The 5-period Smoothed Moving Average, shifted forward by 3 bars.
These lines help traders see the market’s direction. When the lines are stacked and separated, the Alligator is “awake” and the market is trending. But when they are tangled together, the Alligator is “sleeping,” and the market is consolidating.
Three Phases of the Williams Alligator Indicator
1. Sleeping Phase (Consolidation Period):
When the Alligator lines (Jaw, Teeth, and Lips) are intertwined, it indicates that the market is in a sideways range. It’s a time to stay out of the market because no clear trend has developed.
2. Waking Up (Beginning of a Trend):
The Alligator wakes up when the Lips (green line) cross above or below the other two lines. This is the early signal that a trend might be starting.
3. Eating with an Open Mouth (Trend Continuation):
As the lines spread apart (with the Lips leading), the Alligator is feeding—this is when the market is trending, and traders should ride the wave.
How Is the Williams Alligator Indicator Calculated?
Now, I know some of you might be thinking, “Math is not my thing”. But don’t worry, the calculation behind the Williams Alligator is straightforward once you see it in action.
Here’s the formula for each of the three lines:
– Jaw (Blue Line): 13-period Smoothed Moving Average (SMA), shifted forward by 8 bars.
– Teeth (Red Line): 8-period Smoothed Moving Average (SMA), shifted forward by 5 bars.
– Lips (Green Line): 5-period Smoothed Moving Average (SMA), shifted forward by 3 bars.
Each of these moving averages is calculated by averaging the past closing prices over a certain period (13, 8, or 5 days). The forward shift is what sets the Alligator apart from other moving averages — it allows the lines to act as predictive tools, showing potential future price movements.
The shift in the moving averages (by 3, 5, or 8 bars) is what makes the Alligator unique. It’s like the lines are peeking into the future, helping you anticipate when the Alligator (market) will wake up or go back to sleep. This forward shift is crucial for predicting market behavior and timing your trades.
What Signals Are Provided by the Alligator?
Now that you know how the Alligator is constructed, let’s talk about how to interpret its signals.
Bullish Signal
A bullish signal occurs when the Lips (green line) cross above the Teeth (red line) and the Jaw (blue line). This tells you the Alligator is waking up and starting to hunt. It’s a signal to consider entering a long position.
Bearish Signal
A bearish signal happens when the Lips cross below the Teeth and Jaw. This is the Alligator turning downwards, indicating a potential downtrend. Traders would look to enter a short position at this point.
Consolidation Signal
When the Alligator lines are tangled together, it’s a consolidation signal. The market is resting, and it’s time to stay out. Nothing to see here—move along until the Alligator wakes up again.
Examples of the Williams Alligator Indicator
To truly get the hang of the Alligator Indicator, let’s look at a few examples that illustrate how it works in real trading situations.
Example 1: Bullish Trend Example
Let’s say you’re trading the EUR/USD currency pair. The Alligator’s Lips (green line) cross above the Teeth (red line), and the Jaw (blue line) is lagging. As the lines spread apart, the price starts trending upwards. In this case, you’d enter a long position, riding the trend as long as the Alligator’s mouth remains open.
Example 2: Bearish Trend Example
In another case, imagine you’re trading Tesla stock. The Lips (green line) cross below the Teeth and Jaw, signaling that the Alligator is waking up hungry for a downtrend. You enter a short position, and as the lines continue to spread apart, the stock price falls, confirming your bearish trade.
Example 3: Consolidation Example
Here’s a more frustrating example: Bitcoin is trading sideways, with the Alligator’s Lips, Teeth, and Jaw all tangled together. This signals that the Alligator is sleeping, and it’s time to avoid trades. You wait patiently, avoiding false signals, until the Alligator finally wakes up and gives you a confirmed trend.
How to Use the Alligator Indicator in Forex Trading
The Alligator Indicator is especially useful in forex trading, where trends can last for a long time, and consolidation periods are frequent.
Forex markets are known for their liquidity and trending behavior, which makes the Alligator Indicator an excellent tool. Currency pairs like EUR/USD, GBP/USD, and USD/JPY often exhibit strong directional trends, and the Alligator can help you spot these trends early. Here is how you can use alligator indicator strategies in forex trading:
1. Identify Trend Direction:
Watch for the Lips (green line) crossing above or below the other two lines. When they spread apart, it’s a signal that the trend is starting.
2. Combine with Other Indicators:
For better accuracy, combine the Alligator with other indicators like the Relative Strength Index (RSI) or the Moving Average Convergence Divergence (MACD). For example, if the Alligator gives a bullish signal and the RSI is below 70 (not yet overbought), this could be a strong confirmation to go long.
3. Enter and Exit Trades:
Enter trades when the Alligator’s Lips cross the Jaw and Teeth with strong momentum. Place a **stop-loss** just below the Jaw (in a bullish trend) or above it (in a bearish trend). Exit the trade when the Lips start to curve back towards the Teeth, indicating that the trend may be ending.
- Entry: Look for the Lips to cross the Teeth and Jaw with a clear directional move.
- Exit: Consider exiting when the lines start to converge, signaling that the trend is losing strength. You can also use a trailing stop to lock in profits as the trend progresses.
Best Alligator Indicator Settings
The settings you use for the Williams Alligator Indicator can make or break your strategy. But don’t worry, I’ve got some tips to help you tailor the settings to suit your trading style.
The default settings for the Alligator are:
– Jaw (Blue Line): 13-period Smoothed Moving Average (SMA), shifted forward by 8 bars.
– Teeth (Red Line): 8-period Smoothed Moving Average (SMA), shifted forward by 5 bars.
– Lips (Green Line): 5-period Smoothed Moving Average (SMA), shifted forward by 3 bars.
These settings work well for most market conditions, especially in trending markets. The forward shift is what makes the Alligator predictive, as it helps you see where the market might be heading.
Adjusting Settings for Different Markets
In more volatile markets, like cryptocurrencies, you might want to adjust the settings to make the Alligator more responsive to rapid price changes.
- For crypto or fast-moving stocks, consider shortening the periods — for example, try a 10-period Jaw, 6-period Teeth, and 3-period Lips.
- For more stable markets, such as forex pairs like EUR/USD, the default settings work just fine.
Best Timeframes for the Alligator
While the Alligator can be used on any timeframe, it tends to work best on:
- 1-hour, 4-hour, or daily charts: These timeframes provide a good balance between catching trends and avoiding false signals in short-term noise.
- Multiple Timeframe Analysis: For more accuracy, you can use the Alligator on higher timeframes (daily) to confirm the trend while trading on lower timeframes (1-hour or 4-hour).
Pros and Cons of Alligator Trading
Like any tool, the Williams Alligator Indicator has its strengths and weaknesses. Let’s break them down.
Pros:
- Simple and Easy to Understand: The visual nature of the Alligator makes it easy to grasp, even for beginners. The three lines give clear signals about whether the market is trending or consolidating.
- Effective in Capturing Trends: The Alligator is a trend-following indicator, so it does a great job of keeping you in the market during strong trends.
- Works on Multiple Timeframes: Whether you’re a day trader or a swing trader, the Alligator can be applied on different timeframes without losing effectiveness.
- Avoids Sideways Markets: One of the biggest advantages is that the Alligator helps you avoid choppy, sideways markets where traders typically get whipsawed.
Cons:
- False Signals in Ranging Markets: The Alligator can get tangled up in sideways markets, giving false signals. This is why it’s important to combine it with other indicators like Fractals or RSI.
- Lags Behind Price Action: Like all moving averages, the Alligator lags behind price. This means you might miss the perfect entry point, especially in fast-moving markets like crypto.
- Not Ideal for Highly Volatile Markets: In highly volatile or choppy markets, the Alligator can struggle to give accurate signals. You may need to adjust the settings or combine them with other tools to make it more reliable.
How to Mitigate Cons
Combine with Other Indicators: Use complementary indicators like RSI or MACD to confirm the Alligator’s signals and reduce false breakouts.
Wait for Confirmation: Instead of jumping in as soon as the Alligator lines cross, wait for confirmation from price action or other technical indicators.
Williams Alligator Indicator FAQ
Curious about the finer details? Let’s address some frequently asked questions about the Williams Alligator Indicator.
Q1: Is the Williams Alligator Indicator suitable for beginners?
Absolutely! The Alligator Indicator is beginner-friendly because of its simple visual cues. However, like all tools, it requires practice. I recommend using it in a demo account first to get comfortable with the signals.
Q2: Can the Alligator Indicator be used for day trading?
Yes, but keep in mind that the Alligator works best on longer timeframes (1-hour, 4-hour, daily). For day trading, you might need to adjust the settings to make the indicator more responsive — shorten the periods to catch quicker trends.
Q3: What other indicators work well with the Alligator?
The Alligator pairs well with Fractals, RSI, and MACD. These indicators help confirm the Alligator’s signals and minimize false entries during consolidation periods.
Q4: How do I know when the Alligator is “sleeping”?
When the Alligator’s Jaw, Teeth, and Lips get tangled together, the market is consolidating. This is the Alligator’s “sleeping” phase, and it’s a signal to stay out of the market until a clearer trend develops.
Q5: What are some common mistakes traders make when using the Alligator?
The most common mistake is entering trades during consolidation. When the Alligator is sleeping, the market is choppy and unpredictable. Another mistake is not confirming the Alligator’s signals with other tools, which can lead to false entries.
Conclusion
The Williams Alligator Indicator is a powerful tool for identifying trends and avoiding the dreaded sideways market. By using its three smoothed moving averages — the Jaw, Teeth, and Lips — traders can easily spot when the market is trending and when it’s better to sit on the sidelines.
Remember, while the Alligator is a great standalone tool, it works even better when combined with other indicators like Fractals, RSI, or MACD. This combination can help you avoid false signals and make your trades more precise.
As with any trading strategy, practice is key. Try using the Alligator on a demo account to get comfortable with its signals before diving into live trading. Whether you’re a beginner or an experienced trader, mastering the Alligator will give you an edge in the market.
So, what are you waiting for? Fire up your Allpips account and start taming the Alligator today!
