The forex market is a highly volatile market, where traders take advantage of the price fluctuations to make profits. One of the most popular trading strategies in the forex market is the use of technical indicators, which are mathematical calculations based on the price and volume of a currency pair. One such indicator is the Alligator, which is a trend-following indicator that helps traders identify the direction of the trend and the potential entry and exit points.
The Alligator indicator was developed by Bill Williams, a renowned trader and author of several books on trading. The indicator is based on the idea that the market has three phases, which are the bullish phase, the bearish phase, and the consolidation phase. The Alligator comprises three moving averages, which represent these three phases of the market.
The three moving averages are named the Jaw, Teeth, and Lips, and they are calculated as follows:
Jaw (blue line): This is a 13-period Smoothed Moving Average (SMA) that is shifted 8 bars into the future.
Teeth (red line): This is an 8-period Smoothed Moving Average (SMA) that is shifted 5 bars into the future.
Lips (green line): This is a 5-period Smoothed Moving Average (SMA) that is shifted 3 bars into the future.
The moving averages are plotted on the price chart, and they converge and diverge as the market moves. When the Alligator is asleep, the three lines are intertwined, and the market is said to be in a consolidation phase. However, when the Alligator wakes up, the three lines diverge, and the market is said to be in a trending phase.
The Jaw, Teeth, and Lips moving averages act as support and resistance levels, and traders use them to identify potential entry and exit points. When the Jaw, Teeth, and Lips are aligned in a bullish configuration (Jaw at the bottom, followed by Teeth, and then Lips), the market is said to be in an uptrend. Conversely, when the Jaw, Teeth, and Lips are aligned in a bearish configuration (Jaw at the top, followed by Teeth, and then Lips), the market is said to be in a downtrend.
Traders use the Alligator indicator in conjunction with other indicators and price action analysis to confirm the direction of the trend and the potential entry and exit points. For example, traders may use the Alligator to identify the direction of the trend and then use a candlestick pattern or a momentum indicator to confirm the entry signal.
In conclusion, the Alligator is a trend-following indicator that helps traders identify the direction of the trend and the potential entry and exit points. The indicator comprises three moving averages, which represent the bullish phase, the bearish phase, and the consolidation phase of the market. Traders use the Alligator in conjunction with other indicators and price action analysis to confirm the direction of the trend and the potential entry and exit points. The Alligator is a useful tool for traders who want to follow the trend and make profits in the forex market.
