Introduction to the Williams Alligator Indicator

Financial markets trend only 15% to 30% of the time, while moving sideways 70% to 85% of the time. Most trading losses occur during these sideways ranges when there is no clear trend. The Williams Alligator is designed to help traders identify when a market is trending and, perhaps more importantly, when it is "sleeping" in a range.

The Three Components of the Alligator

The indicator consists of three smoothed moving averages, each represented as a part of an alligator's mouth:

• The Lips (Green Line): A 5-period simple moving average (SMA), smoothed by 3 bars on subsequent values. This is the fastest moving average.
• The Teeth (Red Line): An 8-period moving average, smoothed by 5 bars. This acts as the middle line.
• The Jaw (Blue Line): A 13-period simple moving average, smoothed by 8 bars. This is the slowest moving average.

Identifying Market Trends and Ranges

The Alligator indicator uses the relationship between these lines to determine market conditions:

1. The Sleeping Alligator (Range)

When the lines are close together and frequently intertwined or crossing without a clear direction, the alligator is "sleeping." This indicates a sideways range, and traders should generally avoid taking positions during this time.

2. The Hungry Alligator (Trend)

When the lines spread apart (the mouth opens), it indicates a strong trend. The wider the gap between the lines, the stronger the momentum.

• Uptrend: Lines are spread apart and heading upwards.
• Downtrend: Lines are spread apart and heading downwards.

3. The Sated Alligator (Weakening Trend)

As a trend comes to an end, the lines will begin to converge or come closer together, signaling that it may be time to close positions.

The Flaw in Traditional Crossover Strategies

The classic way to use this indicator is to wait for the green line (Lips) to cross the other lines. However, because the Alligator is a lagging indicator, waiting for a full crossover often results in late entries, causing traders to miss the bulk of a major move.

An Advanced Entry and Exit Strategy

To enter trends earlier and maximize profit, use the following rules based on the position of the Lips relative to the other lines:

Short Position Entry

• The Lips (Green Line) must be above the other two lines.
• Wait for a candle to close below the Teeth (Red Line).
• Enter the short trade immediately upon that close.

Long Position Entry

• The Lips (Green Line) must be below the other two lines.
• Wait for a candle to close above the Teeth (Red Line).
• Enter the long trade immediately upon that close.

Exit Signal

To protect profits and exit before a reversal becomes too deep, close the trade as soon as a candle hits the Lips (Green Line).

Adding the 200 EMA for Higher Probability

To further filter out bad signals, combine the Alligator with a 200-period Exponential Moving Average (EMA) to identify the long-term trend:

• Only take Long positions if the price is above the 200 EMA.
• Only take Short positions if the price is below the 200 EMA.

By using the Alligator for entries and the 200 EMA as a trend filter, you avoid trading against the primary market momentum and capture trends much earlier than traditional crossover methods.