Developed by Bill Williams, the Alligator Indicator is a trend following and trend change indicator. It uses three different Smoothed Simple Moving Averages (SSMAs) which slow the turn of the indicator and uses 5, 8 and 13 periods as default - you can change the calculation method from SSMA to SMA (Simple Moving Average) or EMA (Exponential Moving Average) in the configuration dialog.
The three Smoothed Moving Averages comprise the Jaw, Teeth and Lips of the Alligator where:
- Jaw (blue line) – starts with the 13-bar/candle SSMA and is smoothed by 8 bars/candles on subsequent values
- Teeth (red line) - starts with the 8-bar/candle SSMA and is smoothed by 5 bars/candles on subsequent values
- Lips (green line) - starts with the 5-bar/candle SSMA and smoothed by three bars/candles on subsequent values
The Alligator Indicator helps you to determine trends and trend changes and direction of the trend where:
- Uptrend: Jaw at bottom, Teeth in the middle, Lips at the top
- Downtrend: Jaw at top, Teeth in the middle, Lips at the bottom
When the above rules are not in place – when the lines are not in any of the above orders and intertwined - the Alligator “sleeps” with its mouth closed. When it wakes up and is hungry, it opens its mouth in the correct order above, and that is when a trend starts. When the Alligator is no longer hungry and the three lines intertwine again, that signals the end of a trend.
Using the Alligator Indicator, you should not take a position when the Alligator is sleeping as the market is indecisive without a clear trend.