Alligator Indicator
What Is the Alligator Indicator?
The Alligator indicator, developed by Bill Williams, is a technical analysis tool designed to help you identify the presence and direction of market trends. It uses three smoothed moving averages (SMMAs) set at three Fibonacci-based periods—13, eight, and five—to help identify trend movement.
Each moving average period is identified using the following labels and color codes:
Jaw. Slowest moving average (13-period) is color-coded blue
Teeth. Medium moving average (eight-period) is color-coded red
Lips. Fastest moving average (five-period) is color-coded green
Each one is offset forward (into the future) to indicate convergence/divergence relationships.
Williams created this indicator on the premise that trends occur only 15% to 30% of the time, with the remaining periods consisting of sideways or non-trending movements. The Alligator was, therefore, designed to signal the “awakening” of a new trend from its non-trending, or “sleeping,” state.
Calculating the Alligator Indicator
The Alligator indicator is calculated using three smoothed smoothed moving averages (SMMA):
Jaw (Blue Line): This line is calculated as the 13-period SMMA of the midpoint prices (average of the high and low prices), shifted forward (into the future) by eight bars.
Teeth (Red Line): This line is calculated as the eight-period SMMA of the midpoint prices, shifted forward by five bars.
Lips (Green Line): This line is calculated as the five-period SMMA of the midpoint prices, shifted forward by three bars.
The calculation of the smoothed moving average (SMMA) itself for a given period is a bit more involved as it considers the previous period’s SMMA value and the current period’s price.
The three lines—Jaw, Teeth, and Lips—make up the Alligator's mouth, and the relationship between these lines helps to identify trend presence, direction, and potential market entries and exits. The forward shift of these averages is intended to help project future potential price movements, aiding in trend confirmation.
Interpreting the Alligator Indicator
To interpret and use the Alligator indicator, you should be able to identify the three market phases—sleeping, awakening, and hungry—and how each phase corresponds to the Alligator’s three moving averages: the Jaw (blue line), Teeth (red line), and Lips (green line). The chart below displays the Alligator action in the chart of SPDR Gold Shares ETF (GLD).
The Sleeping Alligator
A “sleeping” Alligator corresponds with a non-trending market. In this condition, the three Alligator lines are intertwined or very close together, indicating a lack of trending movement. Sleeping Alligators are typically found during a market consolidation phase in which there’s no clear direction. Generally, you’d avoid trading during this phase of the market.
The Awakening Alligator
During the “awakening” phase, the Lips (green line) crosses the other lines (Teeth and Jaw). This indicates the likelihood that a new trend may be forming; hence, the Alligator is "waking up," so to speak. For some traders, this crossover may signal a potential entry point; for others, it alerts them that a significant market movement may be underway. The direction of the cross (upward or downward) indicates whether the potential trend may be bullish or bearish.
The Hungry Alligator
Once the trend gathers strength and momentum, the three moving average lines will separate and expand. In this market phase, the Alligator is considered “hungry.” At this point, traders who haven't entered their positions (long or short, depending on the direction of the trend) will likely be waiting for the next opportunity to do so. The point here is to ride the trend until you see signs of exhaustion or reversal, typically when the three lines converge again.
As a set of actionable signals, you might consider entering a trade (long or short) during the “awakening” phase. Ideally, you will want to see the Alligator shift into a “hungry” phase, which signals a strengthening trend. If the trend is already established, you should finesse your market entry using a trading setup that aligns with your preferred trading strategy.
Conversely, consider exiting your position when the lines converge. This indicates that the Alligator is about to enter a resting or “sleeping” phase and that the trend is weakening.
To increase the reliability of the signals, the Alligator indicator can be combined with other technical analysis tools, such as oscillators or volume indicators, which can help confirm the Alligator’s signals.
Charting the Alligator Indicator With StockChartsACP
Once you've logged into your StockCharts.com account, open StockChartsACP and follow these steps:
1— Enter the symbol for the stock, index, or exchange-traded fund you want to analyze.
2— From Chart Settings, scroll down the list of Standard Indicators.
3— Select Alligator
To change the color, style, or other parameters, select the settings icon next to the indicator and modify the parameters.
You'll notice that you can change the periods and offsets for the Jaw, Teeth, and Lips. However, you might not want to change the default parameters unless you’re familiar with the Alligator’s period and offset settings. If you are, you may customize the functions of the Jaw, Teeth, and Lips period and offsets.
Do you want the Jaw, Teeth, and Lips to be less transparent? You can change the Opacity to lighten the lines by sliding the Opacity scale or clicking the minus and plus buttons. The default Opacity setting is at maximum.
Do you want to see dashed or dotted lines, or would you like them to appear thicker? You can switch Line Style to customize this. Just click on the menu and make your selection.
Under Line Style, you can choose to display only the Jaw, Teeth, and Lips lines, display only the Fractal arrows, or display both. The fractal arrows emphasize trading signals—the up arrows appear above the price bar, and the down arrows appear below the price bar. They can be used to identify swing highs and lows or you can combine the lines and fractals to create a trading strategy (see chart below).
The Bottom Line
The Alligator Indicator helps analyze trends and generate trend-based entry and exit signals. This indicator highlights the different phases of the market—represented by the sleeping, awakening, and hungry Alligator conditions—and emphasizes the importance of timing in trading strategies. You might consider using the Alligator with other technical analysis tools to boost the indicator's accuracy, confirm trends, and refine your trading decisions.
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