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The Bill Williams Alligator Indicator

The Bill Williams Alligator Indicator is a trend-following indicator. As its creator stated, the entire idea of the markets is that they tend to trend between 15% and 30% of the time. Most of the market is grinding sideways in general. Most of the market is grinding sideways in general.

The alligator indicator comes built into the Metatrader platform, therefore attracts a lot of attention due to that alone. 

This indicator only works in trends, and it should be avoided when you are in a sideways market. It’s based upon the moving averages, so gives you an idea of when a market is trending, therefore it’s relatively easy to see whether or not you should be using the indicator. The indicator is relatively simple to use, so that of course makes it popular as well. 

Adding the Alligator Indicator to Metatrader

It’s very easy to add the indicator to the Metatrader platform, as it’s already built in. All one has to do is click on Insert, select Indicators, and then follow that with Bill Williams, finally select the Alligator option after that, which will set the indicator active. 

Then, you get the Alligator options box, which has several different things that you can change. The basic options include the Jaws period, Teeth period, and the Lips period. You can also choose the Shift variable along with these options.

 

Applying the Bill Williams Alligator indicator to Metatrader

 

Once you click Okay, the indicator then appears on the main price chart. That being the case, you then see the lines appear. There are three moving averages, which are set at 5, 8, and 13.

 

The indicators are known as the jaw, the teeth, and the lips of the alligator. Although Williams describes this as an alligator, it’s essentially just three moving averages. It’s because of this that it should be relatively simple for most traders to start to use it almost immediately.

What the Alligator Indicator Tells Us

The Alligator Indicator uses the previously mentioned 5, 8, and 13 smoothed moving averages. These are all Fibonacci numbers, so it makes sense that there will be a certain amount of mystique around the indicator as a lot of traders like the idea of using Fibonacci. 

 

The Jaw is the 13 smoothed moving average, which is smoothed by eight bars on previous values. The Teeth is the 8 smoothed moving average, which is smoothed by five bars on previous values. The Lips features the five bar smoothed moving average, which is smoothed even further by three bars on previous values. This will plot a green (5) moving average, a red (8) moving average, and a blue (13) moving average.

 

The Bill Williams Alligator Indicator on a chart

 

The indicator looks for convergence/divergence in order to build signals. The Jaw (blue) makes slower turns than the others, while the Lips (green) will be the fastest moving average in the indicator. Because of this, the triple indicators are used very similar to a three moving average server system. For example, if the green indicator slices through the other two to the downside, it's a sell signal. On other hand, if the green indicator slices through the other two to the upside, that’s a bullish sign and a potential buy signal. 

 

Bill Williams suggested that when the downward cross occurred, it was when the alligator was sleeping, while an upward cross is the alligator awakening. It’s probably not that important as to whether or not he calls it one thing or the other, because this will follow a lot of the same rules that a triple moving average crossover system will. After all, that’s all this is but there are some tweaks to the calculations because they are smoothed. 

 

If the three moving averages are stretched apart, that is generally a sign that you are in a trend and should maintain whatever the position is. In the example below, you can see that the moving averages go from being twisted to spread out relatively far at the first red arrow, they compress, and then spread out even further at the second red arrow. 

 

At both of those arrows, the Alligator Indicator is letting you know that the market is extremely bearish, and you should be hanging on to short positions. In fact, you can even make an argument for the compression between the two red arrows as not quite enough to get you out of the original position.

 

Alligator Indicator showing strong downtrend

 

The indicator showing a couple of strong downtrend is the first thing he would notice, but the question then becomes whether or not you are extraordinarily cautious or if you are a little bit more aggressive. In other words, the Lips rising above the Teeth of the indicator, or the green moving average digging into the red moving average between the two arrows could be a sign to start taking profits if you are already short of the currency pair. At this point, it truly comes down to your personal preference, and traders will use both methodologies when it comes to using the Bill Williams Alligator Indicator. 

According to the description Bill Williams himself uses, there are a couple of ways to describe what’s going on. When the moving averages are short and choppy, then quite often he will describe it as either the market sleeping, or the alligator “being sated.” When the three moving averages start to spread and move in the same direction, then the mouth is opening and the “alligator is starting to eat.” In the chart just below, you can see that there are blue, red, and orange boxes. 

In the blue boxes, the moving averages start to spread and rise, which is a very bullish sign, while the orange boxes show choppy trading conditions with the moving averages, meaning that you are either flat of the market or trying to take profits from your position previously. The red rectangle is the mouth opening for the alligator to eat again, this time driving to the downside.

 

Alligator opening and closing its mouth

 

Adding MACD to Help the Alligator Indicator

Looking at the Alligator Indicator, one additional indicator that a lot of traders will use the MACD or Moving Average Convergence Divergence oscillator. This gives traders a “second look” at momentum in the market, right along with price. This setup will operate in the same way that the Moving Average

 

Convergence Divergence oscillator typically does, meaning that there are a couple of signals that you should be aware of when it comes to using this in addition to the Alligator Indicator. 
Looking at the chart below, there are several things that you need to be aware of. The MACD crossing above and below the zero line is important. In fact, marked on the chart are several errors to give you an idea as to how you may wish to trade the market by using the Alligator

 

Indicator and the MACD in concert. Taking a look at the first blue arrow, you can see that the oscillator had crossed the zero line and the histogram in the oscillator started to rise right along with the moving averages of the Alligator Indicator. The next set of arrows are orange, because they show a slowing of momentum. At this point you have the option to either close the trade or perhaps move stop losses up a bit closer. Shortly thereafter, there are signs of life again as the Alligator Indicator starts to open its jaws again, and the MACD histogram starts to rise. 

 

Closer to the top of the chart you see that there is an orange arrow, as the Alligator Indicator starts the clothes it’s jaw again. Furthermore, the histogram on the oscillator has started to drop, suggesting that perhaps momentum is starting to wane a bit. After that, the red arrow signifies the jaw opening yet again for the alligator to eat, while the MACD histogram is starting to drop much lower and well below the zero line. This suggests that there is quite a bit of downward pressure. 

While not marked by arrows on this chart, you can see that the very end of the chart is starting to see the alligator jaws try to close, while the histogram in the MACD is starting to rise, perhaps showing that momentum to the downside is starting to drift a bit lower.

 

Alligator Indicator with the MACD

 

Some Additional Thoughts About the Alligator Indicator

The Bill Williams Alligator Indicator is a great trend following type of indicator, but it must be noted that you should be aware of whether or not the market is trending or not. That’s the idea of adding the MACD indicator to the chart, as it can give you a little bit more clarity as to whether or not there is momentum. Having said that, it’s also important to keep in mind that this is simply a triple moving average system. 

 

That being said, one of the biggest concerns about anything involving a moving average is that it's a lagging indicator. In other words, it shows you where price and momentum was, not where it is. With that in mind, the indicator by itself won’t be sufficient enough to have a working system built around it. Granted, it can give you an idea when to get in and out of the market, but it also could cause a lot of choppy results if you are not cautious. 

 

Some things to keep in mind include: 

  • Bill Williams Alligator Indicator is a lagging indicator

  • It's simply three moving averages

  • The indicator isn’t a system in and of itself and needs help

  • Price action should probably be paid attention to as well

  • Indicator is built into the Metatrader platform

All things being equal, this is a nice way to find longer-term moves, but it should also be noted that it's probably going to produce better results for you on higher time frames, although that is typically the case with indicators and technical analysis in general. Ultimately, the short-term charts will continue to struggle to use anything related to a moving average, as the price fluctuations on a short time frame can be quite rapid. 

Furthermore, it’s probably crucial that you experiment with the idea of whether or not the “alligator being sated” is a reason for you to take profits, or to simply stay out of the market in general. Some traders won’t take profits until the green moving average has crossed all the way through both of the other moving averages, so that is something else to think about as well. In order to figure out what works best for you, it’s important to test in a demo account so that you get familiar with the advent flow of using this indicator. 

 

Candlestick analysis can also be useful, just as it's with any other technical indicator. For example, a hammer or a shooting star may make for a better signal than just a simple spreading of moving averages by itself. A trade setup may be something along the lines of the alligator opening up its jaws again in the Alligator Indicator, the MACD showing a zero line crossing with increasing momentum, and a hammer that suggests the buyers are coming back into the market. 

In other words, simply following the indicator can lead to a lot of choppy and inconsistent results if you don’t temper it with other help. That’s not necessarily that uncommon when it comes to technical analysis and indicators as most systems use at least a couple of them in order to form buy or sell signals. It’s also important to figure out a timeframe that works best for you, not to mention the fact that some markets will act slightly differently than others. That being said, this is a popular enough indicator that several other traders out there will be following it as well.

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