How To Use William’s Alligator Indicator To Make Better Trades

William’s alligator is the name of an indicator that is used for confirming a trend and its direction.  It actually works as a metaphor too. Let’s see how William’s alligator can be used for making better trades.

The Components of William’s Alligator

William’s alligator was developed by Bill Williams in 1995. It consists of three lines that are overlaid on the pricing chart. These 3 lines, each of a different color, are called as the Lips, Teeth, and Jaw of the Alligator. They basically show the interaction of different time periods.

  • The blue line is called as the Alligator’s Jaw. It is the furthest from the price action. It is a 13-period smoothed moving average, displaced 8 periods to the right.
  • The Red Line is called as the Alligator’s Teeth. It is the middle average. It is an 8-period smoothed moving average, displaced 5 periods to the right.
  • The Green Line is called as the Alligator’s Lips. It basically tracks closest to the price action. It is a 5-period smoothed moving average, displaced 3 periods to the right.

The figure below shows the 3 components of William’s Alligator for a stock.

The William’s Alligator indicator works when used in combination with another oscillator or indicator.

 The 3 stages of Alligator and What They Mean

According to Bill Williams, the alligator has 3 stages – sleeping, waking up, and eating.

Alligator Sleeping

Whenever the Jaw, the Teeth, and the Lips are closed or intertwined, the Alligator is said to be sleeping. Typically, the volatility would be low when these three lines are close to each other. Hence, it is best to avoid trading during this period.

Alligator Waking up

After a period of sleep, the alligator wakes up. In this phase, the lips (green lines) cross the jaws (blue line) and teeth (red line). There are two ways in which this cross can happen, each signifying bullishness or bearishness.

  • If the lips (green line) cross the other two lines (red and blue) in an upwards direction, it is called as an awakening bullish Alligator.
  • If the lips (green line) cross the other two lines (red and blue) in a downward direction, it is called as an awakening bearish Alligator.

Alligator Eating

After the waking stage, if a candle closes below or above the three lines, it is termed as alligator eating. In case of an awakened bullish alligator, if a candle closes above the 3 lines, it shows upcoming bullishness. Similarly, in the case of an awakened bearish alligator, if a candle closes below the 3 lines, it shows upcoming bearishness.

The three stages of William’s Alligator is as shown below

How to Make Better Trades Using William’s Alligator

Here is how traders use William’s Alligator to make better trades.

  • Traders go long when William’s Alligator wakes up in an upward direction (green line above the red line and blue line) and a candle is formed above the three lines. When the green line crosses below the red and blue lines, traders exit long position.
  • Traders go short when William’s Alligator wakes up in a downward direction (green line below the red line and blue line) and a candle is formed below the three lines. When the green line crosses above both the red and blue lines, traders exit the short position.
  • Reversal of an uptrend happens when the green line crosses below both blue and red lines and a candle is formed below the three lines.
  • Reversal of a downtrend happens when the green line crosses above both blue and red lines and a candle is formed above the three lines.

Traders typically make use of CCI indicator in combination with William’s Alligator for confirming the buy and sell signals.

Happy Trading!

Tara

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