The Alligator indicator was developed by Bill Williams and it is based on moving averages. Using very colorful analogies to an alligator’s feeding routine, this trend-following indicator uses three different lines described as the alligator’s jaw (blue), teeth (red) and lips (green). Depending on the position of these lines to each other, and whether they are crossing or not, the Alligator indicator can determine if the market is trending or ranging and whether a trader should wait on the sidelines or enter a new position.
According to Williams, this indicator can go through four distinct stages, which are also illustrated in the image below:
- Alligator is awakening: Lips (green line) cross the other two lines. This would signal the beginning of a new trend and traders should enter their trade now.
- Alligator is eating with mouth open: Jaw, Teeth and Lips move further apart and move either higher or lower in the direction of the trend, which tells traders to hold onto their positions for now.
- Alligator is sated: The lines come again closer to each other ending with the Lips (green line) once again crossing the Teeth in the direction opposite to the current trend. This is a signal to take profit, because the trend end is approaching.
- Alligator is sleeping: Market is again ranging/consolidating and the three lines cross each other repeatedly within short periods of time. Traders are discouraged from entering any new trades at this time.
While Williams’ Alligator indicator provides the trader with pretty good entry/exit timing during trending times, one should refrain from using its signals when markets are ranging. It is recommended to first identify a trend using other means, such as the MACD indicator.