In 1995, an American trader and technical analyst, Bill Williams, introduced a technical indicator he called the Alligator indicator.

The name of the indicator is a metaphor that uses the behavior of an alligator to explain the behavior of the indicator in different situations of the market.

Bill Williams likes to use colorful names for his indicators rather than the dry technical names — such as the RSI, ATR, and Stochastic — used by his counterpart.

That is why his trading indicators bear such names as the Alligator indicator, Awesome Oscillator, and the rest.

The Alligator indicator is built in a way that it can identify the absence of a trend, when a trend may be forming, and the direction of a fully formed trend.

Additionally, the indicator can help traders identify impulse and corrective waves. However, you only appreciate those better when you combine the indicator with a momentum indicator.

In this post, you will learn what Alligator indicator is, how it works, how to use it in your trading, and the tools you can combine with it for a better result.

What is the Alligator indicator?

Alligator indicator is a trend-following indicator that was first described by Bill Williams in his book called Trading Chaos.

In the MT4 platform, it is categorized under Bill Williams’ indicators, after the man that created it.

The indicator consists of three moving average lines of different periods overlaid on a price chart to show when the market is in a range or trend.

One interesting thing about the indicator is that the period of each of the moving averages is a Fibonacci number, and each moving average is shifted to the future by a Fibonacci number immediately before the number for the period. Thus, the components of the indicator are as follows:

  • A 5-period simple moving average that is shifted 3 periods into the future (green color)
  • An 8-period simple moving average that is shifted into the future by 5 periods (red color)
  • A 13-period simple moving average that is shifted into the future by 8 periods (blue color)

As one of the few indicators that use a multiple moving average strategy, the component moving average lines have specific default colors to ensure clarity.

alligator-indicator

Bill Williams used the different parts of an alligator’s mouth to describe the three moving averages.

The 5-period (green) moving average represents the lips; the 8-period (red) moving average represents the teeth; while the 13-period (blue) moving average represents the jaws.

The 5-period moving average is most sensitive to price movements and is the first to move in the new direction of the price, followed by the 8-period, and then, the 13-period.

This perfectly corresponds to how an alligator opens its mouth — the lips first, the teeth, and then, the jaws.

It is important to note that since this trend indicator is based on moving averages, it lags the price.

Attaching the Alligator indicator to your chart

It is easy to fix the indicator to your price chart because it is one of the indicators that are naturally present in most charting platform.

However, where you find it depends on the charting platform you’re using. If you’re using Tradingview, simply go to the ‘indicator & strategy’ section and search for Alligator indicator.

For the MT4 platform, here are what you do: click on Insert -> Indicators -> Bill Williams -> Alligator.

After clicking on Alligator, a dialogue box with the default setting will appear. You can use the default settings or change whichever parameter you want. For example, ‘Apply to’ can be the close price or median price.

How the Alligator indicator works

Bill Williams uses the behavior of an alligator to explain what is happening in the market.

Just as an alligator alternates between sleeping and hunting for food, the market also alternates between a ranging period and a trending condition.

When the alligator is sleeping, the mouth is closed, with the lips, teeth, and jaws coming close together.

So, when the three moving averages in the indicator are intertwined, the market is said to be sleeping. Of course, the longer the beast sleeps, the hungrier it will be when it wakes up.

When an alligator wakes up, it opens its mouth in search of food. This corresponds to the moving averages speeding away from each other, which happens when the price is trending.

After feeding, the alligator goes back to sleep — that is, the moving averages converge again.

As you can see, the indicator uses the principle of convergence and divergence of the moving averages.

The moving averages converge when the market is in a range or consolidation, and Bill recommends staying out of the market during such conditions.

As the moving averages start to diverge, a new trend is forming, which, as Bill says, is time to enter the market in the direction of the trend, and when the moving averages start converging again, it is time to take profit.

Thus, the Alligator indicator can help you identify the following conditions in the market :

The absence of a trend

There is no trend when the three moving averages are intertwined. At this period, the market is consolidating with low volatility or becoming very choppy, which is very difficult to trade.

Sometimes, it may be a nicely spaced and established range market that can be traded with a suitable strategy.

aligator-technical-indicator

The beginning of a trend

When a new trend is about to begin, the green line (the lip of the Alligator) is the first line to move in the direction of the trend because it is the fastest of the three moving averages.

The green line crossing the other two moving averages and chasing the price is one of the indications that the Alligator is waking up and getting ready to feed.

Other signs you may notice are the red (teeth) and blue (jaw) lines starting to chase the lip. At this time, the price is already ahead in the direction of the potential new trend, and you may want to enter a trade in that direction.

trading-with-the-aligator

A fully developed trend

In a fully developed uptrend, the green line is above the red line, which, in turn, is above the blue line.

With the lips and the teeth separating from the jaw, the Alligator has completely opened the jaw and started feeding.

As a trader, you should already be feasting on the uptrend by now. But be mindful of the chewing movements (pullbacks) that bring the lips close to the teeth — they may present the best opportunities to enter a trade at this phase.

how-to-trade-with-aligator

For a fully developed downtrend, the green line is below the red line, which, in turn, stays below the blue line.

As the green line and the red line move further away from the jaw, the Alligator’s jaw is completely opened, and it has started taking a bite on the market.

Of course, you should be looking to go short at any opportunity you get, which will likely come in the form of a pullback that might temporarily bring the lips and the teeth together.

trading-with-aligator-oscilator

How to make use of the Alligator indicator in your trading

At this point, we believe that you have not only learned what the Alligator indicator is but also understood how to set it up and use it to determine the state of the market and the direction of the trend. The indicator can show the three stages of market development:

-A market at rest — with the green, red, and blue lines intertwined, the Alligator is asleep

-The beginning of a new trend — the green line crosses the red and blue lines showing that the Alligator is waking up

-An already advancing trend — the lips, teeth, and jaws of the Alligator are wide open and moving in the trend direction, and the price keeps making occasional pullbacks to or beyond the various moving averages and the price crossing back to continue trending

Now, it is time to look at how you can apply what you have learned in developing a suitable trading strategy.

There are many trading strategies you can formulate with this trend indicator. But you have to choose the one that suits your style of trading and the market you are trading.

You should keep one thing at the back of your mind though — being a moving average based indicator, the Alligator does significantly lag the price. Moreover, the moving averages are shifted by 3, 5, and 8 periods into the futures.

Trading a ranging market

When the Alligator is asleep — the lips, teeth, and jaws intertwined — the market may likely be in a range.

A ranging market is one in which the price swings up and down without making a significant displacement to the upside or downside — the market simply moves sideways.

It has an upper boundary where upward price swings reverse to the downside and a lower boundary where downward price swings reverse to the upside

In a ranging market situation, you either trade with a range trading strategy or stay out of the market entirely because not all ranging markets are tradable — some may be too tight or too choppy to provide any meaningful trading opportunity.

Here is how to identify and trade a tradable ranging market using the Alligator indicator :

-When the various lines of the Alligator are intertwined, indicating a potential ranging market, attach a horizontal line at the upper and lower boundaries of the range

-Check the space between the upper and lower boundaries, as well as the average length of the price bars — if the space is small (consolidation) or the price bars are very long (choppy price action), don’t bother trading the range

-If the range is tradable, look for reversal candlestick patterns, such as pin bar, engulfing bar, or inside bar, when the price is around the boundaries of the range

-When there is a bullish pattern at the lower boundary, go long and put your stop loss below the low of that very swing low, and if there is a bearish pattern around the upper boundary, go short and put your stop loss above the swing high

-Place your take profit before the opposite boundary

alligator-indicator-in-ranging

Trading breakouts

The Alligator indicator is very effective in trading a price breakout from a tight range or a chart pattern.

A breakout happens when the price closes beyond the boundary of a range, and it often marks the beginning of a trend.

Since the Alligator indicator can show when a trend is forming, you can use it to trade a breakout strategy.

There are many false breakouts, but a genuine breakout is likely to occur when the Alligator is waking up — the lips crossing the teeth and jaws in the direction of the breakout.

So, when there is a price breakout to the upside, the green line crosses above the red and blue lines to chase the price upwards, and when there is a downward breakout, the green line crosses below the red and blue lines to chase the price downwards.

To put it simply, you can use the Alligator indicator to confirm whether a breakout is likely to work out or fail. These are the steps to follow when trying to trade a breakout with this trend indicator :

-Wait for the breakout candlestick to close above or below the range

-Check whether the Alligator has waking up — the green line crossing above the red and blue lines (if it is an upward breakout) or below both lines if it is a downward breakout

-When the Alligator confirms the breakout, enter a trade in the direction of the breakout

-Place a stop loss beyond the other boundary of the range

-You can trail your profit riding the trend and exit when the moving averages start converging or put a profit target at 2:1 or 3:1 reward/risk ratio

trading-ranging-markets-with-aligator

Trading pullbacks in a trend

When a trend is fully developed — as indicated by the Alligator lips, teeth, and jaws being separated from each other and moving in the direction of the trend — the best way to find trading opportunities is with pullbacks.

Pullbacks are price correction in a trend often induced by profit taking. In an uptrend, a pullback moves downwards and usually reverses to the upside to start a new impulse wave when it reaches one of the moving average lines, which are serving as dynamic support levels.

Conversely, in a downtrend, pullbacks move upward and usually end at resistance levels.

Interestingly, the moving average lines of the Alligator indicator act as dynamic resistance levels in a down-trending market, so pullbacks tend to reverse around those moving averages.

Here is how to trade pullbacks in an uptrend using the Alligator indicator:

-Ensure that all the moving average lines (green, red, and blue) are pointing upwards

-Wait for the price to pull back to the moving averages, especially the red line

-Look for bullish reversal candlestick patterns, such as bullish pin bar, engulfing bar, or inside bar, which can be your trade trigger

-Go long and place a stop loss some pips below the swing low or the blue line, whichever is lower

-Use the 100% Fibonacci expansion level to estimate your profit target or place your target at the next known resistance level

trading-aligator-with-the-trend

To trade pullbacks with the Alligator indicator in a down-trending market:

-Make sure that all the moving average lines (green, red, and blue) are moving downward

-Wait for the price to rally to the moving averages, especially the red line

-Look for bearish reversal candlestick patterns, such as bearish pin bar, engulfing bar, or inside bar — they can serve as your trade trigger

-Enter a short position and place a stop loss a few pips above the swing low or the blue line, whichever is higher

-Place your profit target at the next known resistance level or use the 100% Fibonacci expansion level to estimate a good one

trading-with-indicators

Price crossover

In some situations, the price can pull back much more deeply to the extent that it goes beyond all the moving average lines, only to crossover later and continue in the trend direction.

In this situation, a price crossover is a great way to get into the market in the direction of the trend.

But there are factors to consider before getting into such a trade. It is important to be sure the price is not hitting a support or resistance level immediately after the crossover as that would make it difficult for the price to advance further in that direction.

Follow these steps when trading a price crossover of the Alligator lines during an uptrend:

-After the price has fallen below the Alligator lines, wait for it to climb again and close above them

-Go long if there is no significant resistance level immediately above the price

-Put your stop loss below the swing low

-Place your profit target where you can get at least 2:1 reward/risk ratio

aligator-indicator-strategy

These are the steps to follow when trading a price crossover of the Alligator lines in a downtrend:

-If the price rises above the Alligator lines, wait for it to fall again and close below the indicator lines

-Then, go short if there is no significant support level in front of the price action

-Place your stop loss above the swing high

-You should place your profit target where you can get at least 2:1 reward/risk ratio

aligator-oscilator-strategy

Combining the Alligator indicator with other tools

While you can trade this trading indicator alone with only price actions, it is better to combine the indicator with other technical tools that can identify important price levels or tell you the right time to enter a trade (trade triggers). So, here are some trading tools you can combine the indicator with.

Alligator with support and resistance levels

Support and resistance levels are very important in trading any type of market, including a trending market.

They show where the price had reversed in the past, which can potentially act as price reversal levels again.

Thus, when a support or resistance level forms a confluence with the Alligator lines, a trade setup at such a level will carry a higher chance of success.

In an uptrend, look for trade setups where the indicator and a support level meet, but in a downtrend, look for setups where the indicator lines and a resistance level meet.

alligator-indicator-strategy

Alligator with momentum oscillators

Momentum oscillators are very good trader triggers. You can use them to know the right time to enter a trade after you have identified a trade setup with the Alligator indicator.

One common momentum oscillator that is usually combined with the Alligator is the accelerator oscillator (AC) — another indicator developed by Bill Williams.

In an uptrend, when the AC takes a bullish color after a pullback to the Alligator, it is an indication to go long.

For a downtrend, a bearish color of the AC bars after a pullback to the alligator lines is a signal to go short.

alligator-strategies

Alligator with counter-trend lines

Another tool that can be used as a trade trigger is a counter-trendline applied on a pullback.

The breakout of the counter-trendline after a pullback to the Alligator lines may be a sign of trend resumption.

In a downtrend, the counter-trendline is placed across the lows of the pullback, and a downward breakout is an indication to go short.

For an uptrend, the counter-trendline is placed across the highs of the pullback, so an upward breakout is a signal to go long.

alligator-with-counter-trend-trading

Final words

Alligator indicator is a trend-following indicator that consists of three moving average lines of 5, 8, and 13 periods, displaced into the future by 3,5, and 8 periods respectively.

The indicator behaves like the animal it’s named after —sleeps when there’s no trend, wakes at the beginning of a trend, and bites when the market is trending.