If the lips cross the other lines in a downward fashion, we have an awakening bearish Alligator. The Alligator could start eating after waking up. The signal for a hungry Alligator is after the completion of the waking up stage, a candle closes below or above the three lines. This is when we should go long or short respectively.
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The pink circles show us when the Alligator is attempting to wake up. In these moments, we should prepare ourselves for a long position. No more panic, no more doubts.
Alligator Indicator versus the Triple EMA - Which is the Clear Winner?
Learn About TradingSim When the distance between the lines begins to expand and we see a bullish candle closing above the Alligator teeth and jaws, we go long. The triple exponential moving average, also known as the TEMA, is a single line configuration on the chart. It smoothes the price of the equity three times using an EMA formula and then calculates the change in the EMAs based on the result for the previous day n Traders use the TEMA to enter and manage trades during strong trending markets.
Conversely, the TEMA is not a great tool when the market is ranging, since it provides many fake signals. The TEMA line can easily be mistaken for one of the many moving average indicators. This is a minute chart of Intel from Sep , As you can see, the TEMA bounces above and beneath the price action. The thing that may not be apparent on the chart is the TEMA reduces lag usually created by the other moving averages. The reason for this can be found within the formula of the TEMA. This of course also leads to further lagging in the trading signals.
Thus, be careful when configuring the TEMA as the volatility and the time frame should also be taken into consideration.
Add Some Bite to Your Trading with the Alligator Indicator
The tighter your TEMA, the more fake signals you will encounter on the chart. In terms of signals, the TEMA acts the same way as a standard moving average. When the price breaks the TEMA upwards, a long signal is generated. When the price breaks the TEMA in a bearish direction, a short signal is generated.
Above is a minutes chart of Bank of America from Sep , This is the time you should remember when I said that the TEMA strives to identify rapid market movements, but at the same time fails during ranging markets. We applied a period TEMA to the chart and we get the following results:. What we did not show in the above example are the commission savings you would have racked up by using the Alligator indicator. Of course, one trading example is not enough data to declare victory; however, reducing the noise, less commissions and the fact the Alligator can stand on its own is more than enough reasons to rank it above the TEMA.
Want to practice the information from this article? Best Moving Average for Day Trading. Start Trial Log In. Day Trading Indicators Overlay Indicators. Interested in Trading Risk-Free? There are several trading strategies you can use and keep in mind that all indicator based strategies do lag the market. The indicator alerts us to 3 stages of market development and with understanding those, you can design a simple approach to trading the market:.
You must keep in mind that since we are using displaced moving averages, each of the 3 lines will be plotted ahead of price by the factor of the displacement — 3, 5, and 8 periods. This may affect the trading strategies you use.
What Is Alligator Indicator?
When the Alligator is sleeping, the market is range bound and a range trading strategy may be used which can give you a jump into the market early. You can see in this graphic the 3 lines mixed together. When this occurs, section of the previous high and low and using your entry tactics, trade inside the range.
At the same time, the spacing of the Alligator lines is supporting your short trade. Once the lines have shown a direction, you can resort to using a price pattern that is a staple of all traders — pullbacks. You want to see all lines pointed in the same direction, in order, which shows a trend is underway. Unlike the first strategy, trading pullbacks in a maturing trend does pose risks as the trend may run before giving a trading opportunity. You can determine the length of pullback needed by choosing where price has to pull back to.
Here you can see obvious pullbacks that have pulled to the green and red line while the blue kept the upwards slope. The horizontal line is not a perfect pullback but the tail on the lower green candlestick is a price action reversal near the first pullback low. On the far right, you can see this pullback failed however there was not break above the yellow line before price began to close under the 3 lines. The simplest trading strategy for the Alligator is to trade the close of a candlestick after it crosses the lines.
I would suggest that traders look at support and resistance to ensure the buy and sell signal is not right into a previous cluster of price.
Note the the green line has crossed over the red to the downside. Remember, these lines are displaced into the future and would have plotted in front of the candlestick we are shorting. As for a stop loss when using the Alligator, consider using a multiple of the average true range or use previous swing high and lows. The most important part of the Bill Williams Alligator is when the 3 lines are mixed together.
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This is when the Alligator is considered to be sleeping and no trading signals are present. You should keep these instruments on your radar especially if price action is hinting at an increase in momentum. The best time to get on board a trend move is just before it happens. While you may not be able to pick the exact price the trend begins, getting in as close to the beginning as possible should be your goal. When the Alligator is feeding, watch for pullbacks against the main trend direction and trade those moves with a pullback strategy.
As with any trading strategy, it is vital that you test it, lay out a trading plan, and ensure risk management is priority one. Hey John. I personally trade daily charts. Any timeframe you choose, make sure to test it. With moving averages on lower time frames, you can get a ton of whip back and forth. Thanks for explaining Alligator indicator in detail! Thank you for a really great explanation about Alligator in such a clear concise manner.
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