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The Alligator indicator is a trending indicator developed by legendary trader Bill Williams. It is comprised of three smoothed moving averages moved forward into the future, and is aimed at gauging trend stregnth and identifying new trends. Its lines are the following:
1. Blue Line (Alligator's Jaw) - It is a 13-period smoothed moving average moved 8 bars into the future. Designed to show the long-term trend, it is the slowest of the Alligator's moving averages.
2. Red Line (Alligator's Teeth) - 8-period smoothed moving average, moved 5 bars into the future.
3. Green Line (Alligator's Lips) - 5-period smoothed moving average, moved 3 bars into the future. It is the fastest moving average and designed to show the shortest-term trend.
There are basic methods and principles of trading with the Alligator: First of all, when the moving averages are interwined (crossing), the alligator is sleeping with its mouth closed and trend is not present. To satisfy the rules for trading, all the moving averages must be aligned in the order of their period.
The Lips must be above the Teeth, and Teeth above the Jaw for long trades. The opposite is true for short trades. The longer the alligator "sleeps", the hungrier it gets when it becomes awake. The equivalent to this rule in market terms: the more the market trends, the stronger the trend will be when it begins.
The standard trading method with the Alligator is to enter trades as all the moving averages align – this is a trend-following approach that functions well in trending currencies such as the GBPUSD and GBPJPY. However, Bill Williams suggests to combine the Alligator with the Fractals. According to his trading system (Chaos System), one should enter trades when the Fractals indicator signals the trade, and confirm with the Alligator.