The Alligator indicator was introduced for the first time in 1995 by Bill Williams. This indicator is composed by three lines, created to help the trader to define the presence of a trend and its direction. The Alligator indicator can also help investors denote impulse and corrective wave formations. However, the tool works optimal when it is used together with a Momentum indicator.
Using a metaphor, we could define some of the characteristics if the indicator. If the three lines are entwined, then the Alligator’s mouth is closed and he is said to be sleeping. When the trend takes shape, the Alligator wakes and starts eating.
The Alligator indicator is available for Metatrader4 trading software, thus there are several steps for calculation of the formula:
- The Alligator’s Jaw – the Blue line, is a 13-period Smoothed Moving Average, moved into the future by 8 bars;
- The Alligator’s Teeth – the Red line, is an 8-period Smoothed Moving Average, moved by 5 bars into the future;
- The Alligator’s Lips – the Green line, is a 5-period Smoothed Moving Average, moved by 3 bars into the future.
Usually, traders add an Oscillator like the CCI, to enhance the value of the trading signals. The Alligator indicator allows the trader stay in the position for a longer period. Bill Williams had also created a Gator histogram indicator for additional help with visual interpretation.