Alligator¶

Definition¶

The Alligator is a trend-following technical tool used to identify market trends and potential reversals. It consists of three moving averages with different periods, representing the Alligator's jaw, teeth and lips. The indicator helps traders gauge the strength and direction of a trend by examining the alignment and interaction between these lines.

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History¶

The Alligator was developed by Bill Williams, a well-known trader and author, who introduced it in his 1995 book "Trading Chaos". Williams designed the Alligator as part of a broader trading strategy to help traders stay aligned with market trends and avoid false signals in ranging markets.

Calculations¶

The Alligator consists of three smoothed moving averages of the price series:

• \(Jaws\) – a moving average of the source price data over \(P_j\) periods, shifted forward by \(S_j\) bars.

\[ Jaws\ (t + S_j ) = { MA\ (Source, P_j, MAType) } \]

• \(Teeth\) – a moving average of the source price data over \(P_t\) periods, shifted forward by \(S_t\) bars.

\[ Teeth\ (t + S_t ) = { MA\ (Source, P_t, MAType) } \]

• \(Lips\) – a moving average of the source price data over \(P_l\) periods, shifted forward by \(S_l\) bars.

\[ Lips\ (t + S_l ) = { MA\ (Source, P_l, MAType) } \]

Interpretation¶

The Simple Moving Average is the default type of moving average, and the Median Price serves as the data source. Other customisable parameters for the Alligator calculation are set to the following by default:

    \(Jaws\)  –  a 13-period moving average, shifted forward by 8 bars
    \(Teeth\)  –  an 8-period moving average, shifted forward by 5 bars
    \(Lips\)  –  a 5-period moving average, shifted forward by 3 bars

The main patterns of the indicator behaviour can be interpreted as follows:

• Crossovers – when the Lips line crosses above the Teeth line, it indicates a bullish trend. When the Lips line crosses below the Teeth line, it indicates a bearish trend.

• Intertwined lines – when the Lips, Teeth and Jaw lines are intertwined or close together it indicates low volatility and a lack of clear trend. It is also commonly known as the Alligator sleep mode.

Application¶

The Alligator can be applied in several trading strategies for spotting buying, selling and managing risk.

• Buy signal – traders might consider entering a buy position when the Lips cross above the Teeth, signalling a possible start of a bullish trend.

• Sell signal – a sell signal could be generated when the Lips cross below the Teeth, signalling the start of a bearish trend.

• Stop-loss placement – traders may use the Alligator lines to help place stop-loss orders. For example, in a buy position, a stop loss might be set just below the last crossover (Lips below Teeth) to limit risk. In a sell position, the stop loss could be set above the last crossover.

• Exit strategies – the Alligator can also signal potential exit points. If the Alligator lines start to tighten or intertwine, indicating a loss of momentum, traders may choose to exit their positions, as it suggests the market may enter a consolidation phase.

• Combining with other indicators – traders are advised to use the Alligator alongside other tools such as the Relative Strength Index (RSI), Moving Average Convergence Divergence (MACD) and Bollinger Bands.

Limitations¶

The Alligator lags due to reliance on moving averages. The indicator may also produce false signals in choppy or sideways markets. Visual interpretation of crossovers may be subjective. Moreover, the Alligator fails to deliver effective information in low-volatility markets.

Summary¶

The Alligator indicator is a technical analysis tool that uses three smoothed moving averages (Jaw, Teeth and Lips) to identify market trends and potential reversals. It generates bullish signals when the Jaw line crosses above the Teeth line, above the Lips line. It generates bearish signals when the Lips cross above the Teeth line, above the Jaw line.