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Alligator Strategy
Master trend following and momentum trading with our comprehensive Alligator analysis
Overview
- •The Alligator indicator, created by Bill Williams, helps identify market trends and periods of consolidation.
- •It consists of three smoothed moving averages representing the Alligator’s Jaw, Teeth, and Lips.
- •It helps traders determine whether the market is trending or ranging.
How Alligator Works
1.
Jaw (Blue Line)
A 13-period smoothed moving average shifted by 8 periods, representing the long-term trend.
2.
Teeth (Red Line)
An 8-period smoothed moving average shifted by 5 periods, representing the medium-term trend.
3.
Lips (Green Line)
A 5-period smoothed moving average shifted by 3 periods, representing the short-term trend.
Key Strategies
1. Trend Identification
- •When all three lines align and move in the same direction, it indicates a strong trend.
- •When the lines intertwine, it suggests a ranging or consolidating market.
2. Entry Signals
- •Buy when the Lips cross above the Teeth and Jaw in an uptrend.
- •Sell when the Lips cross below the Teeth and Jaw in a downtrend.
3. Exit Signals
- •Exit long positions when the Lips cross below the Teeth.
- •Exit short positions when the Lips cross above the Teeth.
Limitations
- •Lag: Due to smoothing, signals can be late in fast-moving markets.
- •Best in trends: Performance degrades in ranging markets and may produce false signals.
