Alligator is an indicator designed to signal a trend absence, formation and direction. Bill Williams saw the alligatorís behavior as an allegory of the marketís one: the resting phase is turning into the price-hunting as the alligator awakes so that to come back to sleep after the feeding is over. The longer the alligator is sleeping the hungrier it gets and the stronger the market move will be.
How to Use Alligator Indicator
The indicator consists of 13-, 8- and 5-period smoothed moving averages shifted into the future by 8, 5 and 3 bars respectively which are colored blue, red and green representing the alligatorís jaw, teeth and lips.
The Alligator is resting when the three averages are twisted together progressing in a narrow range. The more distant the averages become, the sooner the price move will happen.
The averages continuing in an upward direction (green followed by red and blue) suggest an emerging uptrend which we interpret as a signal to buy.
The averages following each other in the reversed order down the slope are a strong signal of an unfolding downtrend so selling at this point would be more than appropriate.
Alligator Indicator Formula (Calculation)
MEDIAN PRICE = (HIGH + LOW) / 2
ALLIGATORS JAW = SMMA (MEDEAN PRICE, 13, 8)
ALLIGATORS TEETH = SMMA (MEDEAN PRICE, 8, 5)
ALLIGATORS LIPS = SMMA (MEDEAN PRICE, 5, 3)