What is the alligator indicator: how to use it in forex trading?

Developed by legendary trader Bill Williams in 1995, the Alligator indicator is a trend indicator. This article will explain the logic behind it, how it is calculated, and how you can utilise the Alligator indicator in your trading strategy. You can use it across all markets, including forex, metals, commodities indices etc. and on any time frame, making it a very widely used and popular market indicator.

Alligator Indicator trading is based on the assumption that markets mostly range (move sideways) and move only in trends about 15-30% of the time. The longer the market has been ranging, the more prominent the subsequent trend, which is where traders can potentially make the most profit. It helps to identify and confirm trends, as well as possible reversals.

Williams named his indicator as such due to the metaphor of the market trends being much like a sleeping alligator. When the market is ranging, the Alligator is sleeping and then awakens and shoots off into action to hunt for food. The longer the beast has been asleep (i.e. markets are static), the more of an attack the Alligator will launch when it arises (i.e. the trend will be stronger). Once it has eaten its fill, it will close its mouth and go back to sleep. We can determine whether or not the Alligator is sleeping based on the balance lines (SMAs).

The indicator is composed of three smoothed moving averages set at Fibonacci numbers 5, 8 and 13, representing the jaws, teeth and lips of an alligator. These lines converge and diverge to signal trend changes. The bigger the divergence of the lines, the stronger the current trend, and the closer the lines, the more likely the trend is about to reverse.

Note that the above parameters are the standard for this indicator; however, they can be adjusted in the trading platform to suit your preferences.

• When the 3 lines intertwine, the Alligator is said to be asleep.
• If the lips line crosses up over the teeth and jaw, this is a signal to buy.
• If the lips coss down below the teeth and jaw lines, it is a signal to sell.
• When the Alligator awakes, the green line, which is the faster SMA, will move first, followed by the red and finally the blue.

The downside to using the alligator strategy is that there may be a delay in identifying trends, so traders will usually combine it with a momentum indicator to help anticipate the movement. It is worth noting that the indicator has limited use in choppy or ranging markets.

This is how the indicator looks when applied to a forex chart:

The Alligator indicator formula (calculation) is as follows:

Median Price=(High + Low) / 2

Jaw=SMMA (Median price, smoothing period 13, shift 8)

Teeth=SMMA (Median price, smoothing period 8, shift 5)

Lips=SMMA (Median price, smoothing period 5, shift 3)

Where:

MEDIAN PRICE — median price
High — the highest price of the bar
Low — the lowest price of the bar

You don't need to worry about calculating this yourself, as the indicator in the platform will automatically do this and plot the lines visually on your chart.

You can find the alligator mt4 indicator in the Navigator window or the 'Insert' menu under the 'Bill Williams' folder. Once you drag and drop it onto a chart, a dialogue box will pop up where you can modify the parameters and line colours. This also applies to Metatrader 5.

The indicator can also be found as default on the MT4/MT5 & cTrader mobile applications as well as the FxPro Edge Webtrader.

On the FxPro cTrader, you can also find the alligator trading indicator as standard under the 'Other' category. You can access the list through the indicator button on the chart or by right-clicking on the chart. You can also edit the parameters as needed.

Due to the intraday trends, many traders find the alligator indicator to work well when trading forex. Lets's take a look at an example of the alligator indicator in forex.

There are three stages (modes) of the Alligator strategy:

• When the three lines are very close together, this means a trend is absent, and the Alligator is sleeping. Hence it is not a good time to open a trade.
• When the fast line crosses through the two slower ones, which then begin to follow in its direction and spread apart, this is the Alligator waking up and opening its mouth, signalling the start of a trend.
• The direction of the trend is indicated by whether the fast line crosses up above or below the slower lines. The widening of the lines in the same direction confirms the trend.

It is important to note that you may see several signals appear as the Alligator sleeps and lines crossover. However, it is the subsequent divergence of the SMAs that confirms the development of a trend.

Looking at the below forex chart (EURJPY 1-Hour), we can see the signals produced in alligator forex trading. The yellow boxes represent the Alligator sleeping (market ranging), the red circles represent a trend reversal to bearish (downtrend), and the green circles represent the beginning of an uptrend.

Often oscillators or momentum indicators such as CCI are used in conjunction with the Alligator Indicator to help confirm signals. Combining with another trend indictor can help to identify trends earlier or to filter out false signals. As is the case with any indicator, it is not foolproof, and no one indicator can fully determine market movements. Some traders may need to tweak the parameters to suit their style.

Forex Alligator indicator lines can act as shifting support and resistance, signalling when to buy and sell and where to place SL/TP.

Overall, Alligator trading is extremely popular, visually easy to read, and the Alligator's analogy certainly draws attention to it! We recommend that you practice using it on a risk-free demo account to determine if it is appropriate for you to use or incorporate into your forex trading strategy.