Bill Williams was a precursor in financial market psychology. He invented quite a lot of indicators that are often used nowadays. These are, among others, Williams Fractal, the Awesome Oscillator, the Accelerator/Decelerator Oscillator, and the Williams Alligator. The latter is the subject of today’s article.
What is the Williams Alligator indicator?
The Williams Alligator belongs to the group of trend following indicators. Its inventor compares it to the alligator being fed. It consists of three moving averages. One is known as the Alligator’s Jaw, the second one as the Alligator’s Teeth, and the last one as the Alligator’s Lips.
The base of the Williams Alligator is the theory that the financial instruments are trending 15-30 percent of the time. For the remaining 70-85 percent, they are ranging. According to Bill Williams, most profitable trades are opened on the trending markets. Moreover, the moving averages of the Williams Alligator can be often used as dynamic support and resistance levels.
The Williams Alligator works perfectly with various chart patterns and other oscillators. It is used to identify the moments when there is no trend or when it begins to form. This gives information about the most profitable entries for the transactions.
The Williams Alligator calculations
The formula for calculating the Williams Alligator indicator looks as follows:
SUM1 = SUM (CLOSE, N)
SMMA1 = SUM1 / N
PREVSUM = SMMA (i – 1) * N
SMMA (i) = (PREVSUM – SMMA (i – 1) + CLOSE (i) / N
N is a smoothing period.
SUM1 signifies a sum of price closes during the period N.
SMMA1 is the first bar smoothed moving average.
PREVSUM means smoothed sum of the previous bar.
SMMA (i) is a current bar smoothed moving average.
CLOSE (i) represents the current price close.
The calculations are quite complex, but the good news is you don’t need to make them. Williams Alligator is a built-in Olymp Trade platform.
Reading the Williams Alligator on the Olymp Trade platform
The Alligator indicator is created by three smoothed moving averages. The first one is the Jaw. It has a blue color and it turns the slowest. The second, the red line is the Teeth and the third one is known as the Lips (green one). This one is the fastest. They are all crossing each other and with their movements, the traders receive the signals to open the transaction.
Trading strategies with the use of the Williams Alligator indicator
The Williams Alligator is a powerful indicator as it can be used for trading short and long positions, recognizing the development of the trend and its strength. Therefore, many good trading strategies are based on this technical analysis tool. I will present the most efficient and popular Alligator strategies.
Recognizing the moment of the trend development
When the three moving averages are close to each other, the Alligator is “sleeping” and it means the absence of the trend. He is awoken and being fed when the distance between the lines expands. The more they diverge, the stronger the trend. When they come closer again, this is a signal that the trend is getting weaker and will shortly reverse or there is some powerful occasion on its way. In such a case, the traders should wait for a signal like the crossover of the green and blue lines or pin bar closing at the Alligator line.
Williams Alligator range scalping
When the lines of the Alligator indicator are tight together, you can say the animal is sleeping and it means the market is ranging. A trader still can open a position thanks to the support and resistance levels. This is called the range scalping strategy. A trend begins to form when a couple of candles break the support or resistance line.
Pullbacks to Alligator
You can trade with the pullbacks to Alligator on the trending markets. Watch the lines of the Alligator. When the Jaw, the Teeth, or the Lips are crossed by the price bar, you can open a trading position. This strategy uses moving averages as dynamic support or resistance. When they are broken, a trader can open a transaction. Just remember that “alligator must be awakened before” you can buy or sell on pullbacks.
Crossover of the Lips and the Teeth
This is a trading strategy that is based on the crossing of two moving averages from the Williams Alligator indicator. The Teeth, which is the red line, and the Lips – the green one. A trader can open up a position when the Lips cross the Teeth from below. A good moment to enter a down trade is when the situation is opposite, that is when the green line intersects the red one from above.
Candles breaking through the Williams Alligator
Candles breakout often gives the signal to enter the trade earlier than a crossover of the Lips and the Jaw. So instead of waiting for the two lines of the Alligator to cross each other, you may wait for a candlestick to break out of all the three lines of the indicator. When a price bar closes below or above the Williams Alligator, you can open an up or down position.
Alligator as dynamic support and resistance
The support and resistance are not necessarily horizontal lines. They can move together with the price and become dynamic support or resistance. All three lines of the Williams Alligator can act as dynamic support or resistance. Hence, you can catch the moment when to enter the trade with them.
A handful of advice when using the Williams Alligator at Olymp Trade
Be careful in market congestions. Bill Williams says this is a time when the animal is not awakened yet, thus you should get a confirmation for your trade from another source or wait for the price to reflect the change in the trend.
Observe the Alligator closely and visualize how the mouth of the animal are opening and closing. These are the moments when the volatility in the market increases and decreases giving information about a probable change in the trend.
You can play with the indicator settings so you will receive different results. Check for yourself what they will be.
Bill Williams was a great inventor and his indicator described today is very common and efficient. It can bring you a significant profit if only you know how to use it. You can apply it for trading commodities, currency pairs, indices, cryptocurrencies, and other assets.
Olymp Trade offers a free demo account which is an excellent place to practice using any new strategy you read about. Apply the Williams Alligator in risk-free circumstances, like the Olymp Trade demo account.
Once you get hold of it, move to the live account and start making money. However, no strategy is fit for all situations in the market. Keep in mind that no strategy is a guarantee for profit–much less this one. Be prepared for losses coming your way, whether you’ve prepared for it, or not. The market can just be like that sometimes.
I encourage you to leave a comment about the Williams Alligator in the comments section below.
Wish you high winnings!
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