The Alligator helps to identify a real trend. Its creator Bill Williams recommends following trends and staying out of trading when the price is range-bound.
Alligator Technical Indicator consists of 3 balance lines (Moving Averages, MAs):
- Blue line (Alligator’s Jaw) – 13-period smoothed MA, moved into the future by 8 bars;
- Red line (Alligator’s Teeth) – 8-period smoothed MA, moved into the future by 5 bars;
- Green line (Alligator’s Lips) – 5-period smoothed MA, moved into the future by 3 bars.
When all 3 lines are intertwined, the Alligator is asleep and the market is range-bound. Traders should follow the example of the Alligator and stay out of the market. As the Alligator sleeps, it gets hungrier and hungrier – the longer it will sleep, the hungrier it will wake up.
After waking up hungry Alligator starts to hunt the price until it has enough pray. Uptrend starts when all 3 lines, one after the other, start rising (the green line is above the red one and the red is above the blue one) – one may open a long position. The Alligator will be chasing the price, which has to be above the Alligator’s Jaw.
Downtrend starts when 3 lines, one after the other, start declining (the green line is below the red one and the red is below the blue one) – one may open a short position. The Alligator will be chasing the price, which has to be below the Alligator’s Jaw.
Having eaten enough, the Alligator starts to lose the interest to the food/price. The lines join back together and it’s the time to fix the profit.
According to the Dow theory, one may use the following strategy:
- If the Alligator shows uptrend on D1, await decline on H4 and buy on M30.
- If the Alligator shows downtrend on D1, await advance on H4 and sell on M30.
You must watch the close price of the candle. If the Alligator lines intertwined at the time of the close, this is a trading signal. If not, one better wait.
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