Like the Gator oscillator, the Alligator indicator was also developed by Larry Williams. The Alligator indicators are presented on the price chart in the form of moving averages from which signals are generated rather than in the histogram format, which the Gator oscillator utilizes. The indicator utilizes the convergence and divergence of three Smoothed Moving Averages (SMMAs) to generate trade decisions. The indicator is designed to detect the beginning and exhaustion of trends from which it generates trade decisions; accordingly the indicator will typically perform poorly in ranging markets.
Median Price = (High + Low)/2
- Jaw, (blue line), is a 13 period SMMA shifted 8 periods into the future. It is the slowest indicator.
- Teeth, (red line), is an 8 period SMMA shifted 5 periods into the future.
- Lips, (green line), is a 5 period SMMA shifted 3 periods into the future. It is the fastest indicator.
Trading using the Alligator Indicator
Like the Gator oscillator the Alligator indicator is traded off the basis of the trend life cycle (see trading using the Gator oscillator).
- When the Alligator’s Lips line crosses the other lines from above traders should look to take short positions. When the Lips line crosses the other lines from below traders will look to initiate a long position (Alligator awakening). These trades should be placed after a sleeping phase.
- When the lines are moving together in unison the position will be held (Alligator eating with mouth wide open).
- When the lines converge together to a smaller area and begin to cross the trend has run its course, and traders will look to cover their position (Alligator Sated).
- When the lines stay inter-twined moving closely around each other the Alligator is sleeping and traders should remain on the sidelines until another awakening phase ensues. The Alligator indicator being a system based on moving averages will suffer from similar weaknesses as the Gator oscillator. The lag in moving average signals can render them ineffectual in whippy trendless markets; therefore it is advisable to deploy the Alligator and Gator with other trend confirming indicators such as the MACD indicator.