The alligator indicator of forex trading was invented by Bill Williams and became widely popular after his publications "Trading Chaos" and "New Trading Directions" had emerged. In this article, we will investigate the key specificities of the alligator index, and will explain the particularities of trading with alligator.
The calculation of alligator for a forex alligator strategy is rather simple, but may seem somehow sophisticated, as it includes the estimation of three SMA indicators at 5, 8 and 13 periods represented by Fibonacci numbers. Auxiliary SMAs are also introduced decelerating indicator turns.
Indicator Alligator calculation technique
The order for calculating the alligator index is the following:
- Median price = (High + Low) / 2
- Alligator's jaw = SMMA (Median price, 13, 8)
- Alligator's teeth = SMMA (Median price, 8, 5)
- Alligator's lips = SMMA (Median price, 5, 3)
The three moving averages described above form the imaginary alligator, with its jaw, teeth, and lips. The alligator's jaw (blue line in the chart above) commences with the 13-bar SMMA, and is smoother by 8 bars subsequently. The alligator's teeth (red line in the chart above) commences with the 8-bar SMMA, and is smoother by 5 bars subsequently. The alligator's lips (green line in the chart above) commences with the 5-bar SMMA, and is smoother by 3 bars subsequently.
It is believed that the alligator stays in rest when the three SMAs are located closely and progress only within a narrow range. If the SMAs tend to progress upwards, this situation might evidence the start of an uptrend, and thus a signal to buy. At the same time, if the SMAs progress downwards, this might indicate an emerging downtrend, and thus signal to sell.
Trading in the forex with alligator might be very efficient when the trader is able to track the period of the alligator's "rest" and "awakening". An example of an alligator forex strategy may be the trend-following strategies where alligator is used for identifying the situation of emerging trends, and in various strategies using fractals where alligator lines are used as balance lines.
Using an alligator trading strategy as a tool of your forex transactions may help significantly broaden your opportunities to get profits through forex trade.