How to Use The Alligator Indicator in Forex Trading
The Alligator indicator can identify market trends and determine ideal entry and exit points based on the trend’s strength. In a trending market, it can confirm buy and sell signals. In our article, we take an in-depth look at the Alligator indicator.
What is the Alligator indicator?
Alligator indicator identifies when a trend is forming along with its continuation or reversal possibilities. The technical indicator consists of three lines: the jaw, teeth and lip.
- The jaw represents a 13-period moving average line which is offset by the coming 8-period moving average.
- The teeth represent an 8-period moving average line which is offset by the coming 5-period moving average.
- The lips represent a 5-period moving average line which is offset by the coming 3-period moving average.
These three lines indicate if a bullish or bearish trend is in effect and where it is going to move in the coming future.
The Alligator indicator works by plotting multiple moving averages on the price chart. It uses the three moving averages called jaws (blue line), teeth (red line) and lips (green line) to represent price trends. When any of these moving average lines cross each other, it means that the trend is in a resting phase, and no new orders should take place due to the weak trend. The resting phase ends when the moving average lines stop crossing one another and move either in the upward or downward direction. If the moving average moves upwards, it signals traders that there is a strong uptrend and signals them to place long orders. If the moving averages move downward, it signals traders that there is a strong downtrend and signals them to place short orders.
Calculating the Alligator indicator
Calculate the simple moving averages of the currency pair
- SUM1 = SUM (CLOSE, N)
- SMMA1 = SUM1/N
- Subsequent values are:
- PREVSUM = SMMA(i-1) *N
- SMMA(i) = (PREVSUM-SMMA(i-1)+CLOSE(i))/N
- SUM1= sum of all the closing prices of the currency pair for N periods
- PREVSUM= smoothed sum of the last/previous bar
- SMMA1= smoothed moving average of the currency pair’s first bar
- SMMA(i)= smoothed moving average of the current bar, excluding the first bar
- CLOSE(i)= current closing price of the currency pair
- N= smoothing period
What is Alligator indicator trading strategy
The Alligator indicator trading strategy depends on the jaws, teeth and lips of the pattern. It provides traders with an ideal entry-level whenever these lines intersect with each other. After entering a trade, you can hold onto it and monitor the pattern until the green line crosses the red and blue lines simultaneously. At this point, the candlestick will close below the three lines, enabling traders to exit the position or execute a short order with an expectation of a falling market. The stop loss order with this strategy can be placed above your entry point after analysing all three lines together. The higher the line you choose for your stop loss level, the higher your risk tolerance and vice versa. You can trade with the alligator indicator and CCI indicator combined by monitoring the overbought and oversold market conditions as well. When the CCI indicator signals an overbought market condition but the three lines cross each other, it signals traders to place a long order. On the other hand, when the CCI indicator signals an oversold condition along with the candlestick closing above the red line, it indicates traders to place a short or exit order. As long as the three lines are not touching each other, it is advised that traders hold onto the trades and monitor the market rather than entering or exiting a new position.
How to trade forex with the Alligator indicator
Select the currency pair you want to trade
Monitor the forex market and choose a currency pair that has followed a strong trend in the past. Since this indicator works best with existing strong trends, it will be beneficial for you to apply the indicator to charts that have a strong trend potential.
Select a currently weak trend
Choose the currency pair that has a weak current trend in the market with a solid potential to reverse. We make this choice because when the alligator is applied to a weak current trend, it is known as a sleeping alligator. And the more an alligator sleeps, the hungrier it becomes to place successful trading orders.
Look for a strong trend reversal
The first step in trading with the alligator indicator is to identify a weak trend that is converting into a strong trend. There is a lack in the market trend when all lines are close to each other but not entwining. A strong trend starts to form as the red and blue lines start moving in the same direction, whereas the green line passes through them. The direction in which all three of them move signifies the current market trend.
Identify the trend direction
If all three lines are moving upwards, with the green line being above the red line and the red line being above the blue line, there is an uptrend signalling long orders. On the other hand, if the three lines are moving downwards with the green line being on the bottom-most level, red being in the middle and blue being on the top, it indicates a downtrend signalling short orders.
Place an order
After you have identified the direction in which the three lines are moving, place an order in the same direction. This means if the lines are up, place a buy order and if the lines are down, place a sell order.
Monitor the market before exiting
Hold onto the trades until the alligator lines are not crossing each other. This is the resting period for the trend and is always followed by a trending phase when the lines begin to cross each other. Place an exit order when you see the alligator’s lines crossing each other.
Apply the Alligator indicator to your charts now
Applying the alligator indicator helps you trade along with strong trends. It is one of the best visual tools available in the market that recognises vital entry points. Start trading with Blueberry Markets, a global forex trading platform, to use this indicator, along with several others. Sign up for a live trading account or try a risk-free demo account.
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