Alligator Indicator Explained – What is the Alligator Indicator?

Bill Williams introduced the Alligator indicator in 1995. The Alligator is as much a metaphor as it is an indicator. It consists of three lines, overlaid on a pricing chart, that represent the jaw, the teeth and the lips of the beast, and was created to help the trader confirm the presence of a trend and its direction. The Alligator indicator can also help traders designate impulse and corrective wave formations, but the tool works best when combined with a momentum indicator.

The “traits” of the Alligator are numerous. If the three lines are entwined, then the Alligator’s mouth is closed and he is said to be sleeping. As he sleeps, he gets hungrier by the minute, waiting for a breakout from his slumber when he will eat. When the trend takes shape, the Alligator wakes and starts eating. Once satiated, the Alligator closes his mouth once again and goes to sleep. Learn about other Forex Indicators.

Alligator Formula

The Alligator indicator is common on Metatrader4 trading software, and the calculation formula sequence involves these straightforward steps:

  1. The Alligator’s Jaw, the “Blue” line, is a 13-period Smoothed Moving Average, moved into the future by 8 bars;

  2. The Alligator’s Teeth, the “Red” line, is an 8-period Smoothed Moving Average, moved by 5 bars into the future;

  3. The Alligator’s Lips, the “Green” line, is a 5-period Smoothed Moving Average, moved by 3 bars into the future.

Software programs perform the necessary computational work and produce an Alligator indicator as displayed in the upper portion of the following chart:

The Alligator indicator is composed of three smoothed moving averages. Traders will occasionally add an “Oscillator” like the “CCI”, as above in red, to enhance the value of the trading signals. In the example above, the “Jaw”, “Teeth”, and “Lips” are below the early uptrend action. When the green and red lines cross above the blue line, it is regarded as a sell signal, and vice-versa. The weakness in the indicator is that timing may “lag” due to its future positioning, the reason for attaching a momentum indicator to anticipate the Alligator’s signal.

The Alligator indicator helps the trader stay in the position for a longer period. Williams also developed a “Gator” histogram indicator to help visually with interpretation.

The next article in this series on the Alligator indicator will discuss how this indicator is used in forex trading and how to read the various graphical signals that are generated.

Next >> Alligator Strategy - How to Use the Alligator in Forex Trading >>

Risk Statement: Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.

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