This is the third article in our Alligator series. If you haven’t already, we suggest that you check out the first article about the Alligator Indicator. In the previous two articles, we have covered the background, the calculations involved, and how to use and read the Alligator indicator. It consists of three lines, overlaid on a pricing chart, 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.

Forex traders focus on the Alligator key points of reference, which are when the lines are entwined, when they are “open”, and when the red and green lines cross. As with any technical indicator, a Alligator chart will never be 100% correct in the signals that it presents, but the signals are consistent enough to give a forex trader an “edge”. Skill in interpreting and understanding Alligator indicator signals must be developed over time. In the example below, let’s develop a simple trading system based on Alligator signals and alerts.

The following trading system is for educational purposes only. Technical analysis takes previous pricing behavior and attempts to forecast future prices, but, as we have all heard before, past results are no guarantee of future performance. With that disclaimer in mind, the “green” circles on the above chart illustrate optimal entry and exit points that can be discerned from using Alligator analysis in combination with the “CCI” momentum indicator that has been added in red.

A simple trading system would then be:

1. Determine your entry point when the Alligator lines are entwined (“sleeping”) and the “CCI” indicator is signaling an overbought condition;

2. Execute a “Buy” order for no more than 2% to 3% of your account;

3. Place a stop-loss order at 20 “pips” below your entry point;

4. Determine your exit point after more than two Alligator lines cross the candlesticks or the “CCI” warns of an overbought condition.

Steps “2” and “3” represent prudent risk and money management principles that should be employed. This simple trading system would have yielded two profitable trades of 70 and 130 “pips”, but do remember that the past is no guarantee for the future. However, consistency is your objective, and hopefully, over time, Alligator Technical Analysis will provide you with an “edge”.

That concludes our series on the Alligator Indicator. For further reading visit our Forex indicators section.

Previous Article << Alligator Strategy in Forex Trading <<

We also recommend you to learn about Aroon Indicator Strategy.

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.