Barnyard imagery is used to describe the way that the Alligator technical indicator works. The market’s stationary most of the time and trends are only observed between 15% and 30% of the time. In fact, there are some traders who stay out of the market most of the time and only enter it when the market is trending.
This is because the trend is your friend. You can generally make good decisions about buying and selling if you observe the trend accurately. Williams said, “Even a blind chicken will find its corn if it is fed at the same time all the while“. This is why trading on the trend is sometimes referred to as a blind chicken’s market.
How to use Alligator indicator
The Alligator indicator can be used to confirm your decision to buy or sell and is used along with other indicators. It combines moving averages that use Fractals and nonlinear dynamics. The three moving averages that are used in this indicator are set at the five, eight and thirteen periods and are overlaid on a pricing chart in a way that represents the teeth, lips and jaw of an alligator, hence the name. These smoothed moving averages help you to confirm the presence and direction of a trend.
The Alligator indicator works best when it’s used along with a momentum indicator. This indicator has several traits. If the alligator’s mouth is closed, the three moving averages are intertwined and he’s said to be sleeping. While he is sleeping, he is waiting for a breakout from his slumber. When the alligator wakes and starts eating, the trend has taken shape. Once the alligator is full, he goes back to sleep and his mouth closes again.
Whenever the alligator awakes, the green line moves first and the breakout is confirmed by movement in the red line. Alligator-influenced trades allow the trader to stay in the option for longer. This indicator works better when the alligator has had a long time to rest. When the Alligator is eating with its mouth wide open, the three lines stretch apart, so long or short positions should be maintained or managed.
When Aligator technical indicator lines converge into narrow bands and start to shift into a horizontal direction, it means that the trend might be ending. You’ll need to realign your position and take profits at this point. At this point, the alligator is thought of as sated.
Calculation of Alligator indicator
In MetaTrader, the three lines that form the alligator have three different colors. The jaw that represents the 13-period smoothed moving average is in blue. This is moved into the future by eight bars. The eight-period smoothed moving average is in red and represents the alligator’s teeth. it’s moved into the future by five bars.
The alligator’s lips are in green. This is a five-period smoothed moving average, which is moved three bars ahead. The moving averages set at five, eight and 13 are all Fibonacci numbers. The software does all the calculations for you to produce the charts.
MEDIAN PRICE = (HIGH + LOW) / 2
ALLIGATORS JAW = SMMA (MEDIAN PRICE, 13, 8)
ALLIGATORS TEETH = SMMA (MEDIAN PRICE, 8, 5)
ALLIGATORS LIPS = SMMA (MEDIAN PRICE, 5, 3)
MEDIAN PRICE – median price;
HIGH – the highest price of the bar;
LOW – the lowest price of the bar;
SMMA (A, B, C) – smoothed moving average. A parameter is for data to be smoothed, B is the smoothing period, C is a shift to the future. For example, SMMA (MEDIAN PRICE, 5, 3) means that the smoothed moving average will be calculated on the median price, smoothing period being equal to 5 bars and shift being 3;
ALLIGATORS JAW – Alligator’s jaws (blue line);
ALLIGATORS TEETH – Alligator’s teeth (red line);
ALLIGATORS LIPS – Alligator’s lips (green line).