The Alligator indicator is a great forex trading tool that has been fascinating traders for a long time. Having a funny name, the indicator shows the power of bulls or bears to reverse a trend. It adapts most to a trending strategy, but it is famous for calling reversals too. For this reason, the indicator is popular among forex traders, trend followers or contrarians. This is one of Bill Williams famous indicators. Together with Fractal, Gator or the Awesome oscillator, the Alligator forex strategy is unique in every way.
The alligator analogy is designed to help describe some of the behaviors of the market as it goes from non-trending to trending. The idea is that the absence of a trend in the market, periods of sideways movement, is like a sleeping alligator. Eventually the alligator wakes and sets off in pursuit of its prey. The longer it has slept the hungrier the beast, in other words the more pronounced the trend will be. By looking at the behavior of the balance lines, we can determine the structure of the market, in other words, whether we are dealing with a sleeping alligator or not.
The indicator applies convergence-divergence relationships to build trading signals, with the Jaw making the slowest turns and the Lips making the fastest turns. The Lips crossing downward through the other lines signals a short sale opportunity while crossing upward signals a buying opportunity. Williams refers to the downward cross as the alligator sleeping and the upward cross as the alligator awakening.
Very often, there is a situation when the price hovers around the intertwined levels of the balance creating fractal signals which trigger but the price doesn't go higher than several points. Bill Williams calls it the trading in the "low rent district" zone. You loose some money but your losses are acceptable in comparison to the profit that you will earn when the real movement starts and you are in it. Sooner or later, the Alligator will open its jaws.
The proposed system shows that trendy tactics always bring a steady income. The Alligator strategy is, of course, not new, but like any classical system, it is profitable, especially over long periods. Traditional lagging of the moving averages is successfully compensated by the mutual offset of the indicator lines. When confirming the trend for a longer period and supplemented with oscillator, the strategy is quite applicable to the time frames from M15 to H1, and at a reasonable capital management it allows to reliably take up to 60% of movement from any trend.