Alligator is an indicator which signals a trend absence, formation and direction. The Alligator indicator was first introduced to the financial markets by Bill Williams in 1995.
Bill Williams, an early pioneer of market psychology, developed a number of original analysis schemes based on the chaos theory in trading. Moreover, he is an author of some bestsellers on trading and a founder of the most popular school “Profitunity Trading Group”, which every purposeful novice trader wants to enter.
B. Williams first tried trading when he was a university student. By that time one of his mates had already been trading and had some good income. Under his supervision Williams took his first steps as a trader and got some good results, too.
As an experienced trader, Bill Williams decided to trade independently, but, unfortunately, he usually ended up being in loss. That had been happening for some years, and then he decided to rely only on himself, on his experience, knowledge and intuition. And gradually things began to improve, and his profits increased. In 1984 Bill Williams founded “Profunity Trading Group”, a school for traders, which is still considered to be one of the pillars of modern traders training. Despite the fact that the teaching method is secret, and all the students sign a non-disclosure agreement, it is known that the basis of teaching is the psychology of trade combined with technical analysis of the trading chaos.
“Trading Chaos”, the first Bill Williams’ book, was published in 1995. It produced the effect of an information bomb explosion, having blown up the minds of many market participants. And that was for a reason: it denied the use of fundamental and technical analytics and ascribed the features of a natural phenomena to the market. Initially, it was decried but some time later the revolutionary theory attracted a lot of supporters. After that, William’s indicators appeared in graphic analyses more and more often, then they seeped into tabloids, and finally they became an essential part of market foreacts.
Bill Williams continued to simplify his trading system for almost 50 years, and the simpler it became, the more profit it generated. The Williams family is still trading the stock market, and they regularly donate half of they profits to support charitable projects.
The Alligator indicator description
The Alligator indicator uses three smoothed moving averages, set at five, eight, and 13 periods.
Three moving averages comprise the Jaw, Teeth, and Lips of the Alligator, opening and closing in reaction to evolving trends and trading ranges:
“Lips” is a 5-period smoothed moving average, moved by 3 bars into the future.
“Teeth” is an 8-period smoothed moving average, moved by 5 bars into the future.
\“Jaw” is a 13-period smoothed moving average, moved by 8 bars into the future.
The longest moving average, a “Jaw” shows the prices level that should be set in the market if no other factors influence it. That is a long-termed analogue of a market fair value, that’s why it’s called “A Balance Line”.
As long as the stock price is above the “Jaw”, the market continuously moves upwards, and if the price is lower that the “Jaw”, the market tends to go down.
Bill Williams called the moving averages Balance Lines. If they are all crossed, he said, the Alligator is sleeping. And the longer it sleeps, the hungrier it gets. This has its logic, and it is compatible with some technical analysis concepts. Williams pointed out, that after the Alligator has woken up after a long sleeping period, it is quite hungry and it starts chasing the price until it is full. And once it’s full, the distance between the moving averages gets shorter, and they converge into narrow bands again, which means the end of the trend.
To set the indicator you should click on a separate technical analysis window on Olymp Trade platform. The Alligator is in the Indicators tab: