What Is the Williams Alligator Indicator?

williams alligator indicator

Bill Williams, a trailblazer in market psychology, created the Alligator indicator, a trend-following tool based on the idea that financial markets and specific securities only trend about 15% to 30% of the time, spending the remaining 70% to 85% moving within sideways ranges. Williams held the view that most profits for individuals and institutions are amassed during periods of strong trends.

How the Williams Alligator Indicator Works?

The Alligator indicator employs three smoothed moving averages, timed at five, eight, and thirteen periods—each a Fibonacci number. The first of these averages is derived using a simple moving average (SMA), and subsequent averages are added to decelerate the shifts in the indicator.

Calculation of the Alligator Indicator

The Alligator indicator is calculated using a series of smoothed moving averages (SMMA) based on Fibonacci numbers. The initial value, SMMA1, is obtained by dividing the sum of the closing prices over N periods (SUM1) by N. For subsequent values, the formula adjusts the previous SMMA by removing its last value, adding the latest closing price, and dividing again by N.

Here’s a breakdown of the process:

  1. SUM1: Total of the closing prices over N periods.
  2. PREVSUM: Previously smoothed sum.
  3. SMMA1: Initial smoothed moving average.
  4. SMMA(i): Smoothed moving average for the current period, except for the initial one.
  5. CLOSE(i): Current period’s closing price.
  6. N: Number of periods for smoothing.
  7. In practice, understanding how the Alligator indicator is calculated helps grasp its mechanics, but users typically don’t need to compute it manually as it can be easily added from the indicator list on most charting or trading platforms.

The indicator features three lines known as the Jaw, Teeth, and Lips, which react to changes in market trends and trading ranges:

  • Jaw (blue line): Begins as a 13-period SMMA and is smoothed over the next eight periods.
  • Teeth (red line): Originates from an eight-period SMMA, smoothed over the following five periods.
  • Lips (green line): Starts with a five-period SMMA, further smoothed over three periods.

Williams creatively used barnyard imagery to explain the function of the indicator, comparing it to a blind chicken that consistently finds its feed, emphasizing the indicator’s ability to guide traders in consistently volatile markets.

Special Considerations

The Alligator indicator uses convergence-divergence relationships among its components to generate trading signals. The Jawline moves the slowest, while the Lips move the quickest. 

A downward cross of the Lips through the other lines suggests a potential short sale, while an upward cross indicates a buying opportunity. Williams describes the downward cross as the alligator “sleeping” and the upward cross as it “awakening.”

When the three lines spread apart and trend upward or downward, it signals a strong trend, referred to as the alligator “eating with its mouth wide open.” During these periods, traders should maintain and manage their long or short positions accordingly. 

Conversely, when the lines converge and align more horizontally, it often signals that a trend might be ending, suggesting it might be time for traders to take profits and realign their positions, a state Williams calls the alligator being “sated.”

However, the indicator has its limitations, particularly in choppy markets where the lines frequently cross each other, leading to false signals or “false positives.” Williams metaphorically states that the alligator is “sleeping” during these times, recommending traders stay on the sidelines until clearer signals emerge. 

This aspect reveals a significant drawback of the Alligator indicator: it can produce many false awakening signals in volatile ranges, resulting in potential losses from whipsaws.

Integration Alligator Indicators With Others

In the described setup, the Alligator indicator comprises three lines: the Jaw (blue line), the Teeth (red line), and the Lips (green line). Additionally, the Commodity Channel Index (CCI), represented by an aqua line, enhances the signal interpretation by providing early alerts.

The Alligator made up of moving average crossovers and shifted forward in time, tends to lag more than the CCI. Typically, the CCI gives the initial signal, followed by an Alligator crossover and a confirming candle that closes above or below all three moving averages.

There are key moments to watch for when using the Alligator indicator:

  • Entwined Lines: Indicates the Alligator is “sleeping.” Here, patience is advised as the market lacks a clear direction.
  • Lines Apart: Suggests the Alligator is “eating.” Traders should stay in the trade as long as candlesticks remain above or below these lines, indicating a strong trend.
  • Converging or Crossing Lines: Signals a potential entry or exit point. However, employing a momentum indicator can pinpoint a more precise exit timing.

Additionally, traders pay close attention to the closing of candlesticks. For instance, an exit signal might be generated when a candle closes above the Alligator’s Teeth (the red line), as seen in the provided example. 

During a downward trend, such as the second move described, the Alligator keeps traders in the position longer, potentially increasing profits. This strategic approach helps in maximizing the effectiveness of the trading system by aligning with market movements and momentum.

Using Williams Alligator In Forex Trading

For those exploring the Alligator indicator within a forex trading strategy, the diagram (referred to but not displayed here) provides crucial insights, particularly during the last downward movement:

williams alligator indicator

This trading system, designed for educational purposes, employs technical analysis to interpret past price behaviours to forecast future prices. However, it’s important to acknowledge that historical performance is not a reliable indicator of future results.

Using the Alligator indicator in conjunction with the CCI (Commodity Channel Index) momentum indicator—represented in aqua—can significantly enhance your understanding of market dynamics. The Alligator’s three lines (Jaw, Teeth, and Lips) and the closing prices of significant candlesticks serve as critical markers for identifying optimal entry and exit points:

Entry Points

These are typically identified when the CCI first signals a potential change in momentum, confirmed by an Alligator crossover (where the Lips cross over the Teeth and Jaw). Entry should be considered when a candlestick closes beyond the Lips, validating the momentum shift suggested by the CCI.

Exit Points

Exit signals might be generated when candlesticks close back across a key Alligator line—typically the Teeth. This indicates a weakening of the trend or momentum initially identified. The timing of exits can be refined further using the CCI to assess the strength of the trend continuation or reversal.

Additional Tips

Over time and with practice, traders can integrate other nuances and indicators to enhance these basic signals. 

For example, watching for divergences between the CCI and price action can provide early warnings of potential trend changes, adding depth to the analysis provided by the Alligator indicator alone.

This approach underscores the importance of synergy between different technical tools to create a robust trading strategy that adapts to evolving market conditions.

Conclusion

In conclusion, the Alligator indicator trading strategy, combined with the CCI momentum indicator, offers a dynamic approach to forex trading. By analysing the interplay of these tools, traders can identify clear entry and exit points, enhancing their strategy’s effectiveness. Continuous practice and integration of additional analytical techniques can further refine this system.

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