Illustration of the Williams Alligator Indicator on a financial chart

Understanding the Williams Alligator Indicator: A Comprehensive Guide for Traders

This blog post explains how the indicator's three smoothed moving averages—representing the alligator's jaws, teeth, and lips—can help traders make informed decisions. Learn how to interpret these signals and enhance your trading strategy with this comprehensive guide.

23 May 2024

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

Jaw (Blue Line):
- 13-period smoothed moving average shifted forward by 8 bars.
Teeth (Red Line):
- 8-period smoothed moving average shifted forward by 5 bars.
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:

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).
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.
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.
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

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

Example Calculation

Jaw Line Calculation:
- Calculate the 13-period SMA.
- Shift the resulting line forward by 8 bars.
Teeth Line Calculation:
- Calculate the 8-period SMA.
- Shift the resulting line forward by 5 bars.
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.

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