Learn To Use Alligator Indicator In Your Trading

The Alligator indicator was part of the Bill Williams trading system who suggested markets trend only 15-30% of the time.  The other times, the market is more in a trading range condition that can be difficult to trade.

Markets trend and market range and the 3 lines of the Alligator indicator, known as the jaws teeth and lips, is designed to alert traders to the presence of either of those market states

From those states, a trader can determine if they will use a range trading strategy, a trend trading strategy, or wait for a breakout strategy to be used.

What Is The Williams Alligator Indicator?

The Williams Alligator is also know as the Alligator Indicator, is a combination of  3 smoothed moving averages  and they are displaced moving averages.

“Displaced” means that the reading is adjusted X bars into the future which is believed to better forecasts future trend direction.

If using a trading platform such as Tradingview, you will have access to the complete indicator.

How Does The Alligator Indicator Work?

Since the market evolves from trend to range as Williams has stated, we can think of the market much like an Alligator and how it lives in the wild. Learning how to read the alligator indicator is simple:

• When the market is ranging, the Alligator is sleeping
• When the market shows signs of a trend, the Alligator wakes up
• There comes a time when the Alligator wants to eat.  The moving averages start to separate giving you a trading setup

You monitor the condition of the three smoothed moving averages to determine what state the “Alligator” is in.

The settings of the 3 line of the Alligator Indicator are as follows:

• Green moving average =  the lips of the Alligator and is set to 5 and displaced into the future by 3 periods (whatever your time frame is)
• Red moving average is the Alligator teeth and is set to 8 periods and is pushed 5 periods into the future
• Blue represents the jaws of the Alligator and is set to 13 periods and displaced 8 periods into the future

Using a Forex example, this is a daily chart of the GBPUSD leading into December 2021.

Let’s go over what the indicator looks like in all three stages:

There is no trend in the market

When the 3 lines are intertwined, we do not have a trend. This is generally a time of low volatility and most traders may want to find another instrument to trade

Possible trend forming

The lips of the Alligator, the green line, is the fastest moving average and will be the first one a trader will want to monitor.  You want to see the green line cross both of the slower moving averages.  This is a sign that the Alligator is waking up.

We will also see the lips and the jaw start to turn in the direction of the green line.  Many traders will enter the market following a candle close above/below all 3 lines at this point.

Trend formed and direction

Considering an up trend, the green line (lips), crosses the red and sometimes the blue line depending on the market state.  The red line (teeth) starts to head upwards crossing the blue (jaw) line and we now determine an uptrend is in place.

What Is A Williams Alligator Trading Signal

When the 3 lines of the Alligator indicator are intertwined, the Alligator is sleeping.  When an Alligator is sleeping, nothing interesting is going on.  The longer the Alligator sleeps, the hungrier it may be when it awakes.

Think of a market that is ranging – we know it will break out and the longer the range continues, the more violent the breakout can be

As the green line starts to cross (the lips opening), we could be looking at an Alligator getting ready to feed.  This is the time that you want to be on alert for a trading opportunity.

As the green line continues in one direction, the red line which represents the teeth of the Alligator, begins to separate and move in the same direction – the teeth are opening.

Once the first 2 lines start to pull away from the blue line, the blue line trends in the same direction – the Alligator has opened it’s jaws and is looking to feast.  The trader is looking to feast on the price action that is happening.

• If the lips (green line) cross the teeth (red) and jaws (blue line) to the upside, consider a bullish Alligator and look for long trades
• When the lips cross the teeth and jaws to the downside, consider looking for short trades as we have a bearish Alligator potential

At this point, you have learned how to setup and use the Williams Alligator to determine the state of the market and the trend direction.

There are several trading strategies you can use and keep in mind that all indicator based strategies do lag the market.

Alligator Indicator Strategies

The indicator alerts us to 3 stages of market development and when understanding those, you can design a simple approach to trading the market:

• The Alligator is sleeping when the 3 lines are intertwined – market is a rest – do nothing – range trade only
• The Alligator is waking up when the green line (the lips) crosses the red and blue lines – possible trend forming – look for breakouts
• The Alligator is eating when a candle closes above/below all 3 lines – you should be in the market – pullback trading

You must keep in mind that since we are using displaced moving averages, each of the 3 lines will be plotted ahead of price by the factor of the displacement – 3, 5, and 8 periods.  This may affect the trading strategies you use.

Trading Ranges and Breakouts

When the Alligator is sleeping, the market is range bound and a range trading strategy may be used which can give you a jump into the market early.  Keep in mind that a market that is transitioning from a consolidation to a trend, can give false signals.

You can see in this graphic the 3 lines mixed together.  When this occurs, section of the previous high and low and using your entry tactics, trade inside the range.

Also note on the far right, price has broken from the range and pulled back – classic breakout/pullback trade.  At the same time, the spacing of the Alligator lines is supporting your short trade.

Trading Pullbacks In Price

Once the lines have shown a direction, you can resort to using a price pattern that is a staple of all traders – pullbacks.

You want to see all lines pointed in the same direction, in order.  This example shows a strong uptrend is underway.

You can determine the length of pullback needed by choosing where price has to pull back to.  Here you can see obvious pullbacks that have pulled to the green and red line while the blue kept the upwards slope.

The horizontal line is not a perfect pullback but the tail on the lower green candlestick is a price action reversal near the first pullback low.

On the far right, you can see this pullback failed however there was not break above the yellow line before price began to close under the 3 lines.

Alligator Line Cross

The simplest trading strategy and trade signal for the Alligator is to trade the close of a candlestick after it crosses the lines.  I would suggest that traders look at support and resistance to ensure the buy and sell signal is not right into a previous cluster of price.

Note the the green line has crossed over the red to the downside.  Remember, these lines are displaced into the future and would have plotted in front of the candlestick we are shorting.

• Green line has crossed the red to the downside
• Short at the low of the candlestick that closed below all 3 lines
• Close your position when a candlestick closes above all 3 lines

As for a stop loss when using the Alligator, consider using a multiple of the average true range or use previous swing high and lows.

Summary

The most important part of the Bill Williams Alligator is when the 3 lines are mixed together.  This is when the Alligator is considered to be sleeping and no trading signals are present.  You should keep these instruments on your radar especially if price action is hinting at an increase in momentum.  The best time to get on board a trend move is just before it happens.

While you may not be able to pick the exact price the trend begins, getting in as close to the beginning as possible should be your goal.

When the Alligator is feeding, watch for pullbacks against the main trend direction and trade those moves with a pullback strategy.

As with any trading strategy, it is vital that you test it, lay out a trading plan, and ensure risk management is priority one.  Trading the financial markets is not as easy as many make it out to be.

Further Reading

Hope you have learned how to use the Alligator indicator as a possible technical indicator to aid in your trading.  Here are a few other tutorials that you may find of interest:

Trade Entry Triggers

Trading With The 50 Period Moving Average

Where To Place Your Stop Loss