Moving averages are not only a common tool in trading to carry out analyzes, but can also be found in many areas of the economy. They are very easy to calculate and, due to their widespread use, represent very reliable signal transmitters in trading. Many indicators have arisen on the basis of moving averages. This also includes the alligator indicator.
The alligator indicator is therefore - like the moving average - one of the trend-following indicators and has its weaknesses in sideways markets. Here, too, filtering with the help of other indicators is possible, but first let's see what the indicator says and what it really can do.
Alligator indicator: calculation and interpretation
The alligator indicator was invented by Bill Williams, a famous US-born trader and technical analyst. The moving averages are calculated as follows:
- Average price = (high + low) / 2
- Blue MA (pine) = calculated for 13 past periods and 8 periods in the future
- Red MA (teeth) = calculated for 8 past periods and 5 periods in the future
- Green MA (lips) = calculated for 5 past periods and 3 periods in the future
The blue MA represents the slowest average. The interpretation can be done according to the following rules:
- If the lip line crosses the other lines from top to bottom, traders should switch to short -Positions tend or vice versa.
- If the lines move parallel to each other, the entered position should be held.
- When the lines start running against each other, the end of the trend is near. At this point, traders should close their positions.
- If the lines rotate very closely around one another, there is a sideways phase and the trader should initially stay out of the market.
Alligator indicator in practice
It is always advisable to check the interpretation rules set out above. Because often these are rules that are generally defined. Although they are not wrong, they can often be optimized in practice. Let's take a look at the Dow Jones Index and the futures price.
According to the definition above, a position would have to be taken when the green line begins to cross the other lines from above or below. We marked these times in the chart (arrows from left to right).
What we notice directly is that this signal comes too early and sometimes too late. It would have worked well in the case of the first and second trends, but in the third, fourth and fifth cases the signal would not have been successful. Optimization is therefore an advantage. Let's look at the chart again and try to identify the beginning of a trend - and what the indicator has done in detail during this time.
The first downward trend is clearly shown by crossing the green line from above displayed downwards, as is also the definition. By definition, the second trend is also displayed correctly. But as we already know, false signals come as a result.
In addition, we also see that downward trends are shown much more clearly using the indicator, because it is striking that the blue - and not the green - line at Downward trend would have given a great signal every time: if it crosses the other two from left to right before moving on to the downward trend. We can therefore already set up a new, optimized definition here.
However, this would only affect short movements, because if you look at the upward trends, an entry with this definition would in most cases be too late. Therefore, we have to set up a different, optimized definition for the other direction.
And here it actually looks as if the green line is more suitable. However, you shouldn't wait for it to cross the other lines, as that would be too late again; possibly crossing the red line would already be sufficient.
iq option strategy for 60 second strategy Alligator. Proper use of Alligator with moving Average
Conclusion - Alligator optimized
The generally valid interpretations of indicators should mostly only provide a framework. It is therefore recommended to optimize almost all indicators in order to achieve better signaling.
Experience has shown that a distinction should be made between upward and downward trends in the case of the alligator indicator. As downward trends are more dynamic, the alligator indicator can provide better signals in this direction than vice versa. When defining a strategy, it might be worth considering only downward movements in signaling. This alone can significantly reduce false signals.
In the next post we will present such a strategy using the Alligator indicator. The broker Binary.com is an established broker for binary options trading and a good partner to test such strategies.
Here you will find information on the DeMarker indicator.