Alligator Indicator Step by Step Explanation with Best Trading Methods
The Alligator Indicator, developed by Bill Williams, is considered a powerful tool that can be used to identify high-probability daily trading opportunities. However, it should always be applied in alignment with the overall market trend for best results.
Components of the Indicator
The Alligator consists of three moving averages with specific settings:
• The first moving average: period 13, shift 8, colored blue.
• The second moving average: period 8, shift 5, colored red.
• The third moving average: period 5, shift 3, colored green.
How to Apply the Indicator on the Chart
1. Open the Indicators List.
2. Navigate to the Bill Williams section.
3. Select the Alligator Indicator.
The indicator will then appear on the chart.
How to Trade Using the Alligator
This indicator generates numerous trading opportunities daily, especially when applied to fast-moving pairs on the one-hour timeframe. The best use comes when combined with the daily trend direction.
• First, identify the overall trend on the daily chart.
• If the daily trend is bullish, focus on buy opportunities.
• If the daily trend is bearish, focus on sell opportunities.
Buy Setup
1. Confirm that the daily trend is upward.
2. On the one-hour timeframe, check that the moving averages are aligned upwards: the green (fast) above the red, and both above the blue.
3. Wait for the price to dip below the green moving average, then rebound and close above it again.
4. Enter a buy trade immediately after the candle closes above the green line.
Sell Setup
1. Confirm that the daily trend is downward.
2. On the one-hour timeframe, ensure the moving averages are aligned downwards: the green below the red, and both below the blue.
3. Wait for the price to rise above the green moving average, then drop back and close below it again.
4. Enter a sell trade immediately after the candle closes below the green line.
Setting Targets and Stop Loss
• Stop loss: place it at the most recent swing low (for buys) or swing high (for sells).
• Take profit can be managed in two ways:
• Method 1: Use two targets. First target equals the stop loss distance, and the second target equals twice the stop loss distance. Example: if stop loss = 40 pips, target 1 = 40 pips, target 2 = 80 pips.
• Method 2: Use nearby support and resistance levels as targets.
Important Notes for Successful Trades
- Opportunities must align with the overall daily trend
If the daily trend is upward, we look only for buy opportunities
And if the daily trend is downward, we look only for sell opportunities.
- When entering trades, be sure not to trade when prices are
at reversal zones on the daily timeframe.
Example: the daily trend is up and there are buy setups on the hourly timeframe,
but at the same time price has already reached a resistance area on the daily timeframe.
In this case, do not trade; pause trading this pair temporarily
because risk is elevated due to the likelihood of price reversing and the trend changing.
Another example: the daily trend is down and there are strong sell setups on the hourly timeframe,
but at the same time price has reached strong support areas on the daily timeframe.
In this case, do not trade; pause temporarily and monitor the pair
because the risk has become very high and there is a strong likelihood of the price reversing
and the trend shifting from down to up.
- Beware of daily news and avoid trading during news releases.
It is preferable to stop trading two hours before the news and for at least one hour after.
- The indicator can be combined with overbought/oversold oscillators such as RSI and Stochastic
to obtain additional confirmations for entries.
- If the indicator is moving sideways and the moving averages are overlapping,
then of course there is no valid entry opportunity.
- Finally, when the identified setup forms at support or resistance areas
in the direction of the trend, the opportunities are stronger and have a very high success rate.
