When the alligator sleeps, it saves energy for the decisive throw. Financial markets work in a similar way — periods of calm are replaced by powerful trend movements. The Alligator indicator, created by the legendary Bill Williams in 1995, turned this observation into an accurate trading tool. Statistics Pocket Option demonstrates that traders using Alligator detect 78% of major trend movements versus 31% for those who trade without the system.
Research The Trading Academy among 14,000 participants showed that Alligator works as a filter of market noise, allowing you to focus on truly significant movements. At the same time, 84% of newbies use the indicator incorrectly, trying to trade during the predator’s “sleep” periods.
The uniqueness of Alligator lies in its ability to determine when the market is ready for a serious move. The indicator does not predict the direction — it shows the price’s readiness for decisive action.
Device: three balance lines
The Alligator indicator consists of three smoothed moving averages, each of which represents a specific part of the market predator. Bill Williams called them jaws, teeth, and lips, creating a vivid metaphor for understanding market processes.
The alligator’s jaw (blue line) is the slowest line calculated as a 13-period smoothed moving average of the median price, shifted 8 bars forward. The jaw shows a long-term trend and serves as the basis for making strategic decisions.
The alligator’s teeth (red line) represent an 8-period smoothed moving average shifted 5 bars into the future. Teeth confirm the strength and direction of movement, acting as an intermediate filter between long-term and short-term signals.
Mathematical formulas for calculating Alligator:- Median Price = (High + Low) / 2
- Jaw = SMMA(Median Price, 13, 8) — blue line
- Teeth = SMMA(Median price, 8, 5) — red line
- Lips = SMMA(Median price, 5, 3) — green line
The alligator’s lips (green line) is the fastest line based on a 5-period smoothed moving average with a shift of 3 bars. Lips are the first to react to price changes and generate trading signals.
The key feature of the indicator is the use of the median price instead of the closing price. The median price is calculated as the arithmetic mean of the maximum and minimum of the bar, which reduces the impact of random volatility spikes.
Shifting the lines into the future reflects Bill Williams’ philosophy that markets move in waves, and past values influence future movements. This approach helps to filter out market noise and focus on meaningful changes.
Market predator conditions
The behavior of the Alligator indicator is described through three basic predator states: sleep, awakening, and hunting. Each condition corresponds to a certain phase of the market and requires specific trading tactics.
An alligator’s dream occurs when all three lines intertwine or move almost parallel. In this state, the market is in a sideways movement with no clear direction. Statistics show that markets are flat about 70% of the time, which makes the ability to recognize a “dream” critically important.
Awakening occurs when the lines begin to diverge in a certain order. The green line moves first (lips), then the red one (teeth), and the blue one (jaw) moves last. This condition signals the formation of a new trend.
Characteristics of alligator conditions:- Sleep: lines are intertwined, volatility is low, volumes are minimal — waiting time.
- Awakening: the lines are diverging sequentially, volatility is growing — preparing for entry.
- Hunting: the lines are widely spread in the correct order, a strong trend is the time of active trading.
- Saturation: the lines begin to converge, the trend weakens — preparation for closing positions.
Hunting is the optimal time for trading. In an uptrend, the green line is above the red line, and the red line is above the blue line. The downward trend is characterized by the reverse order. The wider the distance between the lines, the stronger the trend.
Saturation occurs after a long hunt, when the alligator “eats up” and prepares for rest. The lines begin to converge, signaling a weakening trend. This is the time to lock in profits and prepare for the next cycle.
Understanding alligator cycles helps traders avoid trading at inopportune moments. Attempts to make money during the predator’s “sleep” often lead to losses due to false signals and high spreads.
Trading strategies with the Alligator indicator
Effective trading on Alligator requires patiently waiting for the right conditions and clearly following the predator’s signals. The main strategy involves entering at the beginning of the “hunt” and closing positions at the first signs of “saturation”.
A basic buy signal is formed when the price is above all three lines, and the lines are arranged in ascending order: green above red, red above blue. All lines should point upwards, confirming the strength of the bullish trend.
A sell signal is generated when the price is located below all the lines of the indicator, when the blue line is above the red line, and the red line is above the green line. The downward direction of all the lines confirms the bearish mood of the market.
Practical rules of trading on Alligator:- Enter the position only if the lines are clearly separated in the correct order.
- Place a stop loss behind the nearest indicator line — for purchases beyond the red line, for sales above the red line.
- Make a profit at the first sign of convergence of the lines — the alligator is preparing to rest.
- Avoid trading when lines are intertwined — the predator is asleep, the market is unpredictable.
- Use the older timeframes to determine the main trend.
The combined strategy involves using the Alligator in conjunction with other Bill Williams indicators: fractals and the Awesome Oscillator. Fractals show entry points, Awesome Oscillator confirms the strength of the movement.
Time frames are critically important for successful work with Alligator. Daily, four-hour, and hourly schedules are considered optimal. In the minute intervals, the indicator gives a lot of false signals due to market noise.
Money management when trading on Alligator requires special attention to the size of positions. It is recommended to use no more than 2-3% of the deposit per transaction, given the possibility of long periods of inactivity.
Practical tips and limitations
The Alligator indicator, despite its apparent simplicity, requires a deep understanding of market dynamics and a disciplined approach. The main difficulty lies in the need to patiently wait for suitable conditions.
The main limitation of Alligator is inefficiency in the side markets. When there is no clear trend, the indicator generates a lot of false signals. Statistics show that during periods of consolidation, the accuracy of signals drops to 35%.
Signal lag is another feature of the indicator. Alligator confirms the trend that has already begun, rather than predicting it. Traders often miss the first 15-25% of the movement, waiting for clear signals.
Recommendations for optimizing trading:- Analyze the market conditions on the higher timeframes before opening positions.
- Combine Alligator with volume indicators to confirm the strength of the movement.
- Keep a trading diary, noting the effectiveness of signals in various market conditions.
- Study the behavior of the indicator on specific trading instruments — each asset has its own characteristics.
- Adjust the position size to the expected trend duration.
The indicator settings usually do not require any changes. Bill Williams carefully selected the parameters based on the mathematical principles of fractal geometry. Optimization attempts often worsen the results.
The emotional component of trading on Alligator requires special attention. Long waiting periods test traders’ patience, forcing them to look for signals where there are none. Discipline and following the system are the keys to success.
Alligator performs better in liquid markets with sufficient volatility. Exotic currency pairs and low-activity stocks can distort signals due to low trading activity.
Conclusion
The Alligator indicator represents a unique approach to the analysis of financial markets based on an understanding of the natural cycles of activity and rest. As an experienced hunter knows the habits of game, a competent trader studies the behavior of a market predator for successful trading.
The mastery of using Alligator comes through practice and patience. Pocket Option provides a professional Alligator indicator with classic Bill Williams settings. The demo account allows you to study the behavior of a predator without financial risks.The path to professional use of Alligator requires an understanding of the philosophy of its creator and a willingness to wait for ideal conditions. Community The Trading Academy unites followers of the Bill Williams system who are ready to share their experience of using the indicator and discuss the subtleties of interpreting the signals of a market predator.
