Bill Williams, a legendary trader, introduced the Alligator in 1995. The indicator combines three smoothed moving averages with different time intervals offset by a certain number of periods.
Why did Williams give it such a predatory name? The fact is that each moving average in the indicator represents the components of the alligator’s mouth:
Bill Williams saw a connection between the market and the animal’s behavior. When all the lines twist, the beast sleeps, so the market is in consolidation. However, the longer an alligator sleeps, the hungrier it becomes.
Waking up, the predator goes hunting. After catching prey – in our case, a bear or a bull – it opens its mouth and begins to eat. And this means that a new trend is starting to form. At this moment, the distance between the moving averages increases on the chart.
After the alligator is saturated, he loses interest in food. At this moment, the distance between the moving averages narrows. So, according to Williams’ theory, at this moment, the trader should quit their session and wait for signals about the beginning of a new trend.
Trade UP
Trade up when an upward movement begins after flat, and the twisted lines of the Alligator begin to move up and diverge.
Trade DOWN
Trade down when the market begins to move downwards after flat, and the twisted lines of the Alligator begin to move downwards.
Please note that this indicator works better in a trend. However, in the flat, it can give many false signals. That is why it is necessary to use oscillators to confirm Alligator signals.