What Is the Williams Alligator Indicator?
Legendary businessman Bill Williams, an early market psychology pioneer, created the trend-following Alligator indicator, which is based on the idea that financial markets and individual securities move only 15% to 30% of the time, with the remaining 70% to 85% of the time grinding in sideways ranges. Williams felt that people and organizations make the majority of their earnings during moments of strong trending.
- Williams Alligator is a technical analysis technique that employs smoothed moving averages.
- To begin, the indicator employs a smoothed average generated using a simple moving average (SMA).
- It employs three moving averages with periods of five, eight, and thirteen. The Alligator’s Jaw, Teeth, and Lips are made up of three moving averages.
- To generate trading signals, the indicator employs convergence-divergence connections, with the Jaw making the slowest rotations and the Lips making the quickest.
How the Williams Alligator Indicator Works
The Alligator indicator employs three smoothed moving averages with periods of five, eight, and thirteen periods, all of which are Fibonacci numbers. The first smoothed average is computed using a simple moving average (SMA), and further smoothed averages are used to slow down indicator rotations.
Calculation of the Alligator Indicator
Simple moving average (SMA):
- SUM1 = SUM (CLOSE, N)
- SMMA1 = SUM1/N
- Subsequent values are:
- PREVSUM = SMMA(i-1) *N
- (PREVSUM-SMMA(i-1)+CLOSE(i))/N = SMMA(i).
- SUM1 is the sum of the closing prices for the first N periods.
- PREVSUM – the preceding bar’s smoothed sum;
- Smoothed moving average of the first bar (SMMA1)
- Except for the first bar, SMMA(i) is the smoothed moving average of the current bar.
- CLOSE(i) denotes the current closing price.
- N – the smoothing period.
Knowing the inner workings of the indicator requires understanding how the indicator is calculated. Fortunately, in reality, the computation is not necessary. The Alligator indicator may be added to your charts using your charting or trading platform’s indicator list.
The three moving averages are the Alligator’s Jaw, Teeth, and Lips, which open and close in response to changing trends and trading ranges:
- Jaw (blue line): Begin with a 13-bar SMMA and flattened by eight bars for each successive value.
- Teeth (red line): The eight-bar SMMA is smoothed by five bars on consecutive values.
- Lips (green line): The five-bar SMMA is smoothed by three bars on consecutive values.
Williams described the signal using barnyard images, remarking “Even a blind bird will locate its grain if it is fed at the same time every day… We spent years developing an indication that allows us to keep our powder dry until we reach the blind chicken’s market.”
To generate trading signals, the indicator employs convergence-divergence connections, with the Jaw making the slowest rotations and the Lips making the quickest. Crossing the Lips through the other lines indicates a short sell opportunity, while crossing upward indicates a purchasing chance. The downward cross is referred to as the alligator “sleeping,” while the upward cross is referred to as the alligator “waking.”
The three lines that are spread apart and going higher or lower represent trending periods during which long or short positions should be held and managed. The alligator is said to be “eating with mouth wide open.” Indicator lines that converge into narrow bands and change in a horizontal direction suggest times when the trend may be ending, indicating the necessity for profit-taking and position readjustment. This signifies that the alligator has been “satiated.”
When the three lines crossed each other frequently owing to rough market circumstances, the indicator will flash false positives. According to Williams, the alligator is now “sleeping.” Remains dormant till it awakens again. This reveals a serious flaw in the indicator, since many awakening signals within vast ranges may fail, resulting in whipsaws.
Example of the Williams Alligator Indicator
Meta, previously Facebook (META), has an alligator “waking” indication towards the bottom left of the chart, then begins a strong rise with an alligator “eating with open mouth.” When the price is rising, it falls to the Jawline, but the indicators do not cross. The upward trend continues. When the Lips cross below the Teeth and Jawlines and the lines interweave as the price goes sideways, an alligator “sated” sell signal appears.
The alligator “sleeps” for a while before receiving a fresh waking signal, and the uptrend begins with another “eating with an open mouth” phase. The price continues to grow, but only slowly. Then there is a sell-off, and the mouth expands downward, indicating a downtrend. The lines cross again, indicating that the alligator has been “satiated.” It will stay on the sidelines until the mouth opens again.
The Alligator indicator is applicable to any market or time range. The following is an example of the EUR/USD currency pair.
The Alligator appears in the bottom left corner of the chart, and an uptrend persists for some time. The lines then intersect, resulting in the formation of two minor downtrends. This is followed by an upward purchase signal, resulting in a temporary rally. As the price falls, the Alligator is satiated, and the door opens for a large rise. This is followed by a lengthy sideways phase during which the indicatorlines cross back and forth. This is a sleeping period, and most traders should avoid it. The Alligator is opening its jaws again, or waking, near the far right of the chart, signifying a decline.
The Alligator indicator by Bill Williams is a valuable visual tool for trend assessment and trade entrance timing, although it has limited use during choppy and trendless times. A moving average convergence divergence (MACD) or similar trend identification indicator may be used to confirm buy or sell signals in the market.
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