A multi-timeframe moving average indicator that is sometimes referred to as the Wilders indicator or the Alligator indicator can be a useful addition to a beginner trader’s technical analysis toolkit. Created by noted technical analyst Bill Williams, it helps identify trend direction and signals potential reversals by tracking how various moving averages cross over each other.
In this comprehensive guide, we’ll explain what the Alligator indicator is, the different lines that comprise it, how to read its signals, effective usage strategies for beginners, and how to incorporate it into your Forex trading. By the end, you’ll have a solid understanding of this powerful momentum indicator and be able to start applying it to spot opportunities in the markets.
What is the Alligator Indicator?
The Alligator indicator, also sometimes called the Williams Alligator or multi-timeframe moving average indicator, consists of three exponential moving averages (EMAs) that are plotted to generate signal lines. These include a 13-period EMA (the jaw), an 8-period EMA (the teeth), and a 5-period EMA (the lips). When the shorter moving averages cross above the longer ones, it signals a potential trend change.
These three EMAs can have their colors easily changed on the Allpips platform, along with the period and shift of each one. The Picture below shows you how to do that:
How to Read the Alligator Indicator
Here are the key things beginner traders watch for when analyzing the Alligator indicator:
Convergence and divergence between the lines: This shows changes in momentum, with convergence indicating strengthening trends and divergence potentially foreshadowing a reversal.
Crossovers: When the teeth line crosses above or below the jaw, or the lips cross the teeth, it generates buy or sell signals as momentum is shifting directions.
Respect of technical levels: When the indicator lines respect identified support and resistance areas on the price chart, it confirms the validity of those levels. Breaks through may signal a new phase.
Line color sequencing: The progression of a faster line crossing a slower one (e.g. teeth above the jaw) is considered stronger than if the lines simply touch each other.
Direction of teeth relative to jaw: Downtrends form when teeth are below the jaw, while uptrends are seen as teeth move above the jaw.
Candlestick patterns: Formations that arise around signal events provide potential confirmation of the direction implied.
Beginners should focus on the above keys to understanding how the Alligator’s multiple moving averages interact and what the resulting signals could mean for trade opportunities. With experience, patterns will become clear.
Using the Alligator Indicator Effectively as a Beginner
Here are some tips for effectively using the Alligator indicator as a beginner trader:
Focus on Larger Timeframes
When first learning to interpret Alligator signals, it’s best to focus your analysis on larger timeframes like daily or 4-hour charts. This helps to filter out short-term volatility and noise, clearly identifying the prominent trends that are easier for beginners to trade. Higher timeframes also result in less frequent but potentially higher-quality signals.
Wait for Confirmation
Don’t enter trades immediately upon an Alligator crossover or pattern formation. Beginners need to wait for confirmation of signals, such as a close back-test of a support or resistance zone in the direction of the indicated move. Requiring confirmation reduces the chances of taking whipsaw trades with little follow-through.
Combine with Other Tools
While gaining experience with the Alligator, supplement its signals with additional support from technical indicators like moving averages or the RSI oscillator. Pairing it with other tools prevents depending too heavily on any single analysis method. It also increases confidence by only taking trades that fit the criteria of multiple confirming factors.
Control Risk Through Small Sizes
When starting, limit position sizes until you prove an ability to accurately interpret Alligator results. Small trade sizes help control risk exposure as your skills develop. Consider paper trading to test strategies without capital at risk. Only increase sizing once your backtested approach demonstrates a statistical edge in market conditions.
Record and Review Performance
Beginner traders should keep a thorough trading journal, noting Alligator parameter settings and strategy variations, along with results over numerous market fluctuation periods. This allows for optimizing the approach and knowing what works best when market conditions change. Only proven, remunerative methods deserve promotion from a paper to real money strategy.
The Best Alligator Strategies
Understanding how to implement these strategies based on the Alligator’s signals is key to a beginner’s success.
Trend Trading
Trend trading involves entering a position in the direction of the prevailing trend as indicated by the Alligator lines. For an uptrend, you would look to go long as the teeth line crosses above the jaw line. Conversely, a downtrend would be signaled by a crossover where the teeth line drops below the jaw, providing a short entry opportunity. The goal is to ride the trend in the direction of the moving average momentum.
Fading Moves
When the Alligator lines are jammed together with little separation between them, it shows a lack of strong momentum in either direction. This often precedes a period of consolidation or potentially a reversal. You can take a position opposite to the current market direction, looking to “fade” the move by betting prices will decline if long or rise if short.
Pullback Entries
Strong trends with separated lines will often see small corrections. The strategy here is to wait for these dips to enter, targeting support from one of the Alligator lines like the 13 EMA jaw. By entering on a pullback within an established trend, the trade has a lower risk set up from a better entry point.
Divergence Plays
Divergences between the Alligator indicators and the price action can signal temporary ending patterns. For example, if the lines form a new high but the price does not, it’s a bearish divergence. You would look for a short entry, betting the lack of strength implied will lead to weaker follow-through.
Combining Alligator Indicator with Other Indicators
For a well-rounded approach, beginner traders can supplement the Alligator with additional confirmation from the RSI, stochastic, or MACD. For example, waiting for oversold RSI signals in sync with a bullish Alligator crossover provides a high probability entry. Combining tools reduces reliance on any single indicator.
Conclusion | Alligator Indicator
In summary, the Alligator indicator offers a valuable trend visualization and trade guidance tool that’s easy for beginners to interpret. Its multi-timeframe design helps identify momentum shifts early. With ongoing practice pairing it alongside other studies and testing out various strategies, the Alligator can become a consistently useful ally in the quest to make sensible trading decisions from the start of one’s journey. Perseverance and discipline are key when applying any technical approach.
