The Alligator is a very dynamic display and easy to use. It was devised by Bill Williams. Bill Williams is the creator of several indicators, but today we know the technical indicator known as Alligator, which is commonly used in technical analysis. The indicator combines three smoothed moving averages, which are a combination of balance lines that use fractal geometry and nonlinear dynamics to achieve strategies that allow us to make a profit.
Bill Williams sought to develop an indicator that serve to create input and output signals in periods when the market is most active, namely those where the price moves with well-defined trend, this search came the indicator that we will see below: The Alligator.
These three lines drawn on a graph representing the jaw, teeth and lips of the alligator. It was created to help the operator to confirm the presence of a trend and address. This indicator also helps to designate formations impulsive and corrective waves. To fine-tune the use of this indicator, it is advisable to combine it with a momentum indicator (In future articles we will learn how to handle this indicator).
The Alligator is composed of three lines colored in red blue and green, and this indicator is commonly found in most trading platforms. Describe below representing each of the three lines of the Alligator:
The blue line represents the alligator's jaw. It consists of a smoothed moving average of 13 periods, moved ahead by eight candlestick.
The red line represents the alligator teeth. It consists of a smoothed moving average of 8 periods, shifted forward by 5 candlestick.
The green line represents the alligator's mouth. It consists of a smoothed moving average of 5 periods, shifted forward by three candlestick.
To calculate the balance lines are used the following values:
• n = the number of periods.
• Maximum (n) represents the peak reached during the time period n.
• Minimum (n) is the minimum price reached during the time period n.
• (A, B, C) is a smoothed moving average where A is the data to be smoothed, B is the time to soften and C represents the change time period.
Method of calculation.
• Median Price (n) = [Maximum (n) + Minimum (n)] / 2
• Alligator Jaw (Blue line) Median Price = (n), 13.
• Alligator Teeth (Red Line) Median Price = (n), 8, 5.
• Alligator Lips (Green Line) Median Price = (n), 5, 3.
The lips, teeth and jaw of Alligator show the interaction of different periods of time. Because clear trends appear only during 30% of the time, it's very important to participate in the market when they occur and to abstain when the market moves in narrow ranges.
Let's look at how to interpret this simple indicator:
If the three lines intersect in a narrow range roughly side, as shown in Figure 2. We interpret the crocodile or alligator mouth is closed, in these cases is said to be sleeping. When it is said that the Alligator shut up or already have closed, we understand that the market moves in a narrow price range and presents few opportunities, so you have to wait until resubmitted right conditions to operate. As time passes while sleeping, the alligator gets more and more hungry, the more sleep the Alligator, be hungrier when you wake up and are expected to complete his dream when he will eat. This means that the longer the market side, the longer will the trend when it starts. When the trend takes shape, the alligator wakes, opens his mouth and begins to eat when the divergence between the lines is broad and do not intersect. Once sated, the alligator closes its mouth and falls asleep again until the next time, the crocodile can eat as much downward as upward. That is, can cross lines and show divergent signals as bullish downtrends.