According to the financial market laws, 70% to 85% of the time, the price moves calmly without sharp jumps. The price rarely goes beyond this corridor — yet eventually, it starts trending. The Alligator indicator is meant to determine the moment when the price is going to break out of the corridor. This moment is the perfect timing for the investor to make a move.
Let’s crack this beast’s jaws open and see what’s inside.
What’s Alligator?
The Alligator indicator consists of three moving average lines, each one displaying the average value of an asset for a certain time period. In a stable long-term trend, the lines move in parallel. In a sideways trend, they cross. Together, they form the “Alligator’s Mouth,” which changes its position depending on the market sentiment.
- Alligator’s Jaw — the upper red line. It has the longest period of 13 and an 8 bar shift, i.e., it is moved into the future by 8 bars. It predicts a steady upward trend when the price is above the curve. A downtrend is assumed when the price is below the curve.
- Alligator’s Teeth is the middle orange line with a period of 8 and a 5 bar shift. It shows the same direction as the Jaws line, but for shorter periods.
- Alligator’s Lip is an additional reference point represented by the yellow line with a period of 5 and moved into the future by 3 bars.
The Jaw-Teeth-Lips sequence is considered the natural Mouth position. If the lines move relatively parallel above the price curve, then the market is in a downtrend. If the lines are below the price curve, this indicates an uptrend.
The interlacing of lines is a sign of a flat market. This is called “Alligator’s Sleep” — when the lines move so close that they have a zero discrepancy. Even more so, they intersect. This means that the phase of the sideways movement of the market has begun. Trading at this time is strongly discouraged.
The longer the Alligator stays in the “sleeping” state, the hungrier it gets, and the wider its “mouth” will eventually open. That is, the subsequent price jump will be stronger, and it’s highly likely that a strong, long-term trend will form.
For maximum profit, open trades when the Alligator hunt has only just begun, i.e., when the moving averages are just starting to diverge.
How to set up the Alligator on the IQ Option platform
To configure the Alligator indicator settings, click on the Indicators icon in the bottom left corner of the Traderoom and choose Alligator from the list.
Experienced traders can change the parameters to suit their strategy by lowering or increasing the instrument’s sensitivity to market fluctuations. However, beginners are recommended to use the default settings. As you gain skills and confidence in your trading methods, you can think about more advanced exploitation of the Alligator.
How to use the Alligator
To determine the moment of a new trend formation, the indicator lines should appear on the chart in the following order:
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- The red Jaws line should be far enough from the price curve.
- The orange Teeth line must be between the Alligator’s Jaw and its Lip.
- The yellow Lips line should be located near the price chart.
Expect the signal when the Mouth opens, that is, when the intertwined lines begin to diverge in different directions.
Another way to use the Alligator is determining the trend strength. When the distance between the three lines grows, the trend is getting stronger.
The Alligator indicator is well-suited for both short and long timeframes, which means it’s applicable to Forex, options, and stock trading alike.
How to read the Alligator’s signals
- When the yellow line crosses the red one from above, it is a SELL signal.
- When the yellow line crosses the red one from below, it is a BUY signal.
Be sure to test the signal: wait for the candle at which the lines crossed to close. Moreover, in order to confirm the signal, it is recommended to wait for the next bar to close in the corresponding direction as well in order to make sure that the price has really started to change. If this candlestick closes in the opposite direction, you should ignore the signal.
Alligator indicator combinations
The Alligator is quite efficient both individually and in combination with other technical indicators. Experienced traders prefer to back the Alligator up with additional tools since it may slightly lag with the signals due to the fact that it consists of moving averages. To strengthen the Alligator signals, you can use MACD, Awesome Oscillator, and Fractal.
Conclusion
The Alligator indicator is a powerful tool to spot trend reversal early and estimate the trend strength. It works both for long and short timeframes, which makes it suitable for different instruments. However, keep in mind that no indicators can provide accurate signals 100% of the time. Therefore, one important rule to remember when using the Alligator indicator is to always wait for the close of the second candlestick to confirm the direction of the trend.
