Keep on studying, mate. This is followed by a buy signal to the upside, which results in a brief uptrend. The possibility exists that you could lose more than your initial deposit. In the lower left of the chart, the Alligator opens up, and an uptrend remains in place for some time.
How to read an Alligator Chart
In the above example, an exit signal occurs when a Candle closes above the center Red line or teeth of the Alligator. During the second downward move, the Alligator, for this reason, would have kept you in the trade a little while longer for more profit. Skill in interpreting and understanding Alligator signals must be developed over time, and complementing the Alligator tool with another indicator or pattern of pricing behavior is always recommended for further confirmation of potential trend changes.
In the next article on the Alligator indicator , we will put all of this information together to illustrate a simple trading system using this Alligator indicator. Trading Foreign Exchange on margin carries a high level of risk and may not be suitable for all investors. The possibility exists that you could lose more than your initial deposit. The high degree of leverage can work against you as well as for you.
Brought to you by: The main idea of this Forex indicator is to send a signal when a trend has just started. The indicator based on Median Price instead of Close price as in the case with a common simple moving average. Median Price is an arithmetical average of maximum and minimum price of a bar candle:.
The first moving average is calculated according to the formula, which is the same for a simple moving average, whereas the difference is that median prices are summed. The second and third moving averages are calculated as per the below formula:. The first MA with time period of 13 and shift for 8 bars' forward is called the Alligator's Jaw.
It traditionally has dark blue colour on the chart. The second MA called the Alligator's teeth, has a period of 8 and shift equal to 5. It is usually red. The third MA called the Alligator's Lips, has period of 5 and shift equal to 3. This is a green-colored line see image 1. Legendary trader Bill Williams, an early pioneer of market psychology , developed a number of original technical indicators in a career that spanned more than five decades.
Williams invoked barnyard imagery to describe the indicator, noting "even a blind chicken will find its corn, if it is always fed at the same time The Alligator indicator uses three smoothed moving averages, set at five, eight and 13 periods, which are all Fibonacci numbers. Luckily, calculation is not required in practice. Add the Alligator indicator to your charts from the indicator list in your charting or trading platform.
The indicator applies convergence-divergence relationships to build trading signals , with the Jaw making the slowest turns and the Lips making the fastest turns.
The Lips crossing downward through the other lines signals a short sale opportunity, while crossing upward signals a buying opportunity. Williams refers to the downward cross as the alligator sleeping and the upward cross as the alligator awakening.
The three lines stretched apart and moving higher or lower denote trending periods in which long or short positions should be maintained and managed. This is referred to as the alligator eating with mouth wide open. Indicator lines converging into narrow bands and shifting toward a horizontal direction denote periods in which the trend may be coming to an end, signaling the need for profit taking and position realignment. This indicates the alligator is sated.