Williams Alligator: A Trader’s Guide
The Williams Alligator indicator, named after its creator Bill Williams, is a powerful tool used in technical analysis for identifying trends and potential trading opportunities. This indicator, when used correctly, can help traders make profitable decisions in the markets. In this article, we will explore the Williams Alligator indicator in detail and how it can be used in trading.
What Is the Williams Alligator Indicator?
Bill Williams, a famous trader who was one of the early explorers of market psychology, created a tool called the Alligator indicator. This tool is designed to follow the idea that financial markets and individual stocks only trend a small percentage of the time (between 15% to 30%) and spend the majority of their time (between 70% to 85%) moving sideways within a range. Williams believed that individuals and institutions tend to make most of their profits during the periods when the market is strongly trending.
The Essence of the Alligator Indicator
The Williams Alligator indicator is composed of three moving averages referred to as the Jaw, Teeth, and Lips. These lines dynamically open and close in response to changes in market trends and trading ranges.
The Jaw, represented by the blue line, begins with a 13-bar Smoothed Moving Average (SMMA) and is further smoothed by eight bars in subsequent values. The Teeth, represented by the red line, start with an eight-bar SMMA and is smoothed by five bars in subsequent values. Lastly, the Lips, represented by the green line, starts with a five-bar SMMA and is smoothed by three bars in subsequent values.
In essence, the Alligator indicator helps traders to identify potential trends in the market by detecting the opening and closing of the Jaw, Teeth, and Lips lines. By analyzing these movements, traders can gain insight into the direction of the market and make informed trading decisions.
Trading Suggestions with the Williams Alligator
The Alligator indicator employs the concept of convergence-divergence to generate trading signals, where the Jaw exhibits the slowest movements, while the Lips exhibit the fastest. When the Lips cross below the other lines, it signals a short sale opportunity, and when it crosses above, it signals a buying opportunity. Williams refers to the downward cross as the alligator “sleeping” and the upward cross as the alligator “awakening.”
When the three lines of the Alligator indicator are spread apart and moving in the same direction, it indicates a trending period in which traders should maintain their long or short positions. This is commonly referred to as the alligator “eating with its mouth wide open.” Conversely, when the lines converge into narrow bands and begin to shift towards a horizontal direction, it indicates that the trend may be coming to an end, signaling the need for profit-taking and repositioning. This indicates the alligator is “sated.”
However, during choppy market conditions, the Alligator indicator may produce false positives when the three lines frequently crisscross each other. Williams suggests that the alligator is “sleeping” during these times and recommends traders stay on the sidelines until it “awakens” again. This drawback exposes the possibility of awakening signals within significant ranges failing and resulting in whipsaws.
Real Case Applications of the Williams Alligator Indicator
On Finteria binary options trading platform, Williams Alligator indicator can be used to identify the major market movement, either uptrend or downtrend. See below a quick rundown of this indicator on the platform and an exemplary analysis of the market with this tool.
Click on the ticker’s icon to change the data layout that is more suitable for technical analysis:
Pick the f(x) button to do the technical analysis indicators:
Once clicked, there will appear an indicator menu bar with all functions available on the platform so far:
Once you pick the tool, the indicator itself will appear on the terminal. The green line is the Lips, the red line is the Teeth, and the blue line is the Jaw of the Alligator.
Let’s see the situation of the EUR/USD market using the Williams Alligator indicator. To reiterate, when the green line (the Lips) goes down and crosses the other two lines, it is a short (sell) signal. On the screenshot below, the EUR/USD market did not have a clear trend on the sidelines, which impedes to the better use of Williams Alligator indicator. However, once the lines intertwined, which may be a good signal for longing (buying) the EUR at that moment, the Alligator started to eat with mouth wide open, which is a good sign for holding the instrument till the lines intertwine again for selling.
Conclusion
The Williams Alligator indicator is a powerful tool for identifying trends and potential trading opportunities in the markets. Traders can use this indicator to determine the direction and strength of the trend, as well as potential entry and exit points. However, it is important to remember that no indicator can predict market movements with 100% accuracy, and traders should always practice good risk management when trading.
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