The Alligator indicator or how to catch profit by means of the Predator

Logic and purpose

The financial markets spend 70-80% of trade time in the range without the obvious direction and only 20-30% − in a condition of a trend optimum for profit.

Technically the idea is implemented by means of the moving averages displaced forward («in the future») on the different number of bars.

It allows executing the short-term and medium-term forecast of the price, but the quality of signals strongly depends on stability of the market.

The problem of speculative throws of the price is solved by smoothing (by Smoothed method) and also the by application of PriceMedian instead of PriceClose.

On the small periods, it poorly helps, therefore, the Alligator indicator is most effective in medium-term strategy.

Calculation procedure

The Alligator uses a set of moving averages with different parameters of the shift.

The average price, necessary for calculation, is defined as: PriceMedian = (PriceHigh + PriceLow)/2.

The calculation begins with the value of simple moving average, and further, it is calculated by a formula:

(SMMAi) = (SUM(1) – (SMMAi-1) + PriceMedian(i)) / N

where

• SMMA(i) — smoothed value of the current bar (without the price of the first);
• SUM(1) — the sum of PriceMedian within N periods (since the previous bar);
• (SMMAi-1) — smoothed value of the previous bar;
• PriceMedian (i) — the average price of the current bar.

Three dynamic lines appear on the price schedule:

• SMMA (MedianPrice; 13; 8) – the smoothed 13-period moving average displaced on 8 bars forward; the author’s name − AlligatorsJaw, color by default – blue.
• SMMA (MedianPrice; 8; 5) – the similar moving average displaced on 5 bars forward; AlligatorsTeeth, color – red.
• SMMA (MedianPrice; 5; 3) – the moving average displaced on 3 bars forward; AlligatorsLips, color – green.

Parameters and settings

Let’s look at it in detail:

Alligator is a classical example of trade signals on a breakthrough or a turn from borders of range and power levels.

The following states are possible:

«The Alligator sleeps»

All lines move horizontally, are closely bound among themselves and the price fluctuates in the narrow range around red.

There are no trade signals.

The longer the flat period, the more «hungry» will wake up the Alligator: the price throw will be stronger and a new trend will be longer.

«The Alligator yawns»

The fastest AlligatorsLips (green) reacts ahead to activity of the market – in the direction of a price impulse.

Crossing it by the price is considered the advancing signal, but you shouldn’t open the transaction.

Gradually lines are developed in a necessary order, the distance between them increases (the period of «hunting» opens).

Type of the Alligator indicator during the different periods of the market

«The Alligator opens a mouth»

If the interest of the participants of the market doesn’t weaken, then red AlligatorsTeeth begins to react after green, and the slow blue AlligatorsJaw line always develops the last.

«The Alligator falls asleep»

The return intersection of lines (The Alligator loses interest in «food») before a turn or consolidation is considered the moment of the closing of positions.

The result?

The moment of crossing by the price of all three lines will be a strong signal for an entrance to the market; the transaction on kickback from AlligatorsTeeth looks riskier.

Scheme of formation of trade signals

The strong signal for purchase

The strong signal for sale

The range of volatility is defined by distance from green to the blue line, and the tilt angle allows to estimate force of a new trend.

Application in trade strategy

What this means is:

• green: allows to take a profit maximum, but at very high risk (an aggressive scalping);
• red: will provide an average profit at average risk (moderate trade);
• blue: demands long transactions with big current sag, but will allow taking away all trend almost without loss.

Scheme of restriction of losses

If to put Stop Loss behind the AlligatorsJaw line, then the position becomes steady against casual fluctuations, but the risk increases as at the time of crossing the transaction can already be in a critical loss.

The Stop Loss installation on the fastest AlligatorsLips will cause the closing of a position at small kickbacks against a trend that doesn’t give stable profit.

Example of strategy on standard indicators

We remain out of the market until the emergence of the first fractal higher (below) of all three lines of the Alligator − it means that the price has punched borders of range and has already executed technical kickback.

If the fractal appears in a zone of an intersection of lines of the Alligator – we ignore a signal.

The indicator Alligator in complex system

When the price crosses fractal level the second time after kickback – we put the postponed BuyStop/SellStop order on 2-3 points higher/lower.

Further, it is possible to use each following fractal on a trend for an additional entrance.

So far there are fractals up – only purchases, fractals down – only sales.

SMA(233) is used for the visual definition of a long-term trend: while the price is higher than the line – ascending, lower the line – bear, the line horizontal – there is no trend.

When performing the main condition on fractals we use Stochastic as the filter of false signals: if its lines confirm the movement down (a turn higher than level 70/80) − for sale, or up (the turn is higher than level 20/30) − for purchase.

Several practical remarks

The Alligator indicator can help with the identification of a marking of Elliott`s waves: if the price is behind borders of «AlligatorsJaw», then the market forms a pulse wave and if within the zone – correcting.

A shortcoming of the Alligator is the calculation mechanism on the system of moving averages: signals of the beginning of a trend, as a rule, are late.