What is the Alligator?
The Alligator indicator is a technical analysis tool used in trading to help identify trends and potential entry and exit points. It’s named after the alligator due to its nature of “waking up” and “eating” during trending market conditions.
The Alligator indicator was developed by trader and author Bill Williams to assist traders in understanding the market’s direction and momentum. It consists of three lines on a price chart:
- Jaw Line (Blue Line): This line represents a 13-period Simple Moving Average (SMA) plotted ahead by 8 bars. It’s the slowest moving average and is referred to as the “blue line” on the chart.
- Teeth Line (Red Line): This line is a 8-period SMA plotted ahead by 5 bars. It’s faster than the jaw line and is often called the “red line.”
- Lips Line (Green Line): The lips line is a 5-period SMA plotted ahead by 3 bars. It’s the fastest moving average and is represented by the “green line.”
The concept behind the Alligator indicator is that these three lines, when aligned in a specific way, indicate different market phases:
- Sleeping Phase: When the three lines are tightly intertwined, the alligator is “sleeping,” indicating a lack of strong trend and potential ranging market conditions.
- Awakening Phase: As the lines start to spread apart, the alligator is “awakening,” suggesting that a trend might be emerging.
- Eating Phase: When the lines are in a specific order – the green line on top, followed by the red line, and then the blue line – the alligator is “eating.” This indicates a strong trend and potentially good trading opportunities in the direction of the trend.
Traders use the Alligator indicator to confirm trends, spot potential reversal points, and make trading decisions based on the alignment of the lines. It’s worth noting that while the Alligator indicator can provide valuable insights, like any technical tool, it’s not foolproof and should be used in conjunction with other indicators and analysis techniques.