The Williams Alligator Indicator is a technical analysis tool created by Bill Williams. It’s designed to identify market trends and potential reversals by using a combination of three smoothed moving averages (SMA) that represent the alligator’s “jaws,” “teeth,” and “lips.” Here’s how it works:

Components

  1. Jaw (Blue Line):

    • 13-period smoothed moving average shifted forward by 8 bars.

  2. Teeth (Red Line):

    • 8-period smoothed moving average shifted forward by 5 bars.

  3. Lips (Green Line):

    • 5-period smoothed moving average shifted forward by 3 bars.

Interpretation

The interaction between these three lines provides signals about the market’s state:

  1. Sleeping (Alligator’s mouth closed):

    • When the three lines are close together or intertwined, the alligator is considered to be sleeping. This indicates a non-trending market (sideways movement or consolidation).

  2. Waking Up (Alligator’s mouth opening):

    • When the lines start to spread apart, the alligator is waking up and opening its mouth. This suggests the beginning of a trending market. The direction of the trend is determined by the order of the lines:
      • Uptrend: Lips above teeth, teeth above jaws.
      • Downtrend: Jaws above teeth, teeth above lips.

  3. Eating (Alligator’s mouth wide open):

    • When the lines are widely separated, the alligator is feeding, indicating a strong trend. The wider the separation, the stronger the trend.

  4. Satiated (Alligator’s mouth closing):

    • When the lines start to come back together, it indicates that the trend may be weakening or coming to an end. The alligator is getting full, and a period of consolidation or reversal may follow.

Trading Signals

  • Buy Signal: When the lips (green line) cross above the teeth (red line), and the teeth cross above the jaws (blue line), indicating a potential uptrend.
  • Sell Signal: When the lips cross below the teeth, and the teeth cross below the jaws, indicating a potential downtrend.

Practical Use

  1. Trend Identification: Helps traders identify the beginning of a new trend or the continuation of an existing trend.
  2. Avoiding Ranges: The indicator helps avoid entering trades during non-trending (sideways) markets.
  3. Timing Entries and Exits: Provides signals for entering or exiting trades based on the interaction of the three moving averages.

Example Calculation

  1. Jaw Line Calculation:

    • Calculate the 13-period SMA.
    • Shift the resulting line forward by 8 bars.

  2. Teeth Line Calculation:

    • Calculate the 8-period SMA.
    • Shift the resulting line forward by 5 bars.

  3. Lips Line Calculation:

    • Calculate the 5-period SMA.
    • Shift the resulting line forward by 3 bars.

Conclusion

The Williams Alligator Indicator is a useful tool for identifying market trends and potential reversals by analyzing the relative positions of three smoothed moving averages. It helps traders stay with the trend and avoid non-trending market conditions, enhancing their ability to make informed trading decisions.