Best Strategy Trading with the Alligator Indicator

Trading trends with the Williams Alligator is as easy as identifying a strong trend, being aware of weak trends, and avoiding ranges. For entering and exiting positions, the typical approach is spotting crossovers. However, in this article, traders will find another and more interesting entry strategy by seizing price action candle patterns.

Alligator For Trading Trends

The Williams Alligator is a popular tool among trend-trading operators to detect and follow trending market conditions, starting from the perspective that markets spend most of their price action in back-and-forth movements with no clear direction before entering a trend cycle.

That idea came from Bill Williams, the creator of this indicator, who believed that the markets only trend from 15% to 30% of the time due to most participants taking profits during the stronger period of a trend.

In this sense, the Alligator is also a reliable tool for spotting a range phase but not to trade it, as it generates false signals.

However, traders can use range identification to detect when the market is not trending, hence when not to trade, and at the same time, wait for a breakout of that range and, consequently, a trend cycle.

When a trend cycle starts, then it is time to measure how strong it can be.

Measuring Strong Trend

To measure a strong trend, traders can use the "gap" effect between the moving averages of the indicator. Situations such as the following may take place:

• The gap has to be notable for a trend to be considered strong.
• The wider the gap, the more it strengthens the movement.

Anticipating Weak Trend

To identify a weak trend, traders can use the "narrowing" effect between the moving averages of the indicator. Similar to a strong trend, the following may take place:

• The narrowing has to be notable for a trend to be in a weakening moment.
• The narrower the lines, the weaker the trend.

Identifying Ranges

Measuring strong trends or anticipating weak trends are crucial steps to identify a range.

When a trend gets stronger, it is less likely to fall in a range in the immediate term.

On the other hand, when a trend gets weaker, it is more likely to fall in a range.

Now, identifying a range is essential to know when to trade and when not to. In the same way, if traders identify a range, the only step further is to wait for a trend momentum to start looking for trade setups and signals in the Alligator.

Another essential point to remark on regarding a range is that this condition can precede a continuation of a prevailing trend or a reversion of it.

How To Trade A Trend: Entry And Exit

As mentioned previously, traders should wait for a trend momentum before using the Alligator to get entry or exit signals.

To start reading this indicator signs, let's briefly review its composition, which consists of three moving average lines:

1. Jaw (blue line): it does the slowest turns.
2. Lips (green line): it does the fastest turns.
3. Teeth (red line).

When seeking an entry signal, traders must look for:

• Bullish side: the lips crossing up through the other lines denote long opportunities.
• Bearish side: the lips crossing downward through the other lines indicate short opportunities.

Exiting: What is the role of trend momentum?

Remember the gap and narrowing effects? Well, momentum is binding because it will influence the trend's strengths and weaknesses.

When the momentum is strong, the Alligator widens the gap. Independently of the trend direction, following a bullish cross, it is a suggestion to keep long or short positions open as the market is likely to remain trending.

The Alligator is "eating with mouth wide open."

When the momentum is fragile, the Alligator narrows the lines. Independently of the trend direction, following a bearish cross, it is a suggestion to exit long or short positions as the market is likely to finish the trend.

The Alligator is "sated."

Are Crossovers The Best Way?

Crossover is the primary way to spot entries and exit strategies. However, since it is a lagging indicator, a more efficient manner to seize crossovers is with candlestick price action patterns. In this case, the idea is the following:

• Before the bullish cross: The trader should enter immediately when a candle closes above the lips line, backed up by a movement such as the bullish engulfing pattern or morning star formation.
• Before the bearish cross: The trader should enter immediately when a candle closes below the lips line, backed up by a movement such as the bearish engulfing pattern or evening star.

Traders should also consider practicing other candle patterns on paper trading with the alligator.

Comparative Table For The Alligator Implementation

Conclusion

Alligator is, after all, a simple but powerful indicator with a simple method to identify trends, ranges, and entry or exit points. The entry strategies can be combined with price action for a more efficient execution.

In Altrady, you can trade with the Alligator along with other technical indicators by signing up for a free trial account.