How To Use Alligator Trading Strategy: Complete Guide

Did you want to trade forex, learn a little bit about the business of it and find out how chart analysis works? You may have been surprised at the level of study and how many types of chart formations there are. With our help, you will gain a clearer understanding of how they work. Today we will start with the alligator trading strategy.

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Introduction

An alligator trading strategy may sound like a bizarre term. It can be a dizzying and humbling experience to enter the world of trading without knowing what any terms mean. Even the best traders in the world had to start somewhere and learn their trade. Usually, the best approach is through proven, well-sourced and highly-rated literature about your asset. While this is an ideal start, digesting online literature and speaking to traders who know the industry are two key things to consider.

Much like other chart formations such as candlestick formations, head and shoulder patterns and diamond chart patterns, an alligator chart is named after the shape it forms on an asset’s graph.

It isn’t specific to one asset, either. It could form a shape on a forex chart, a cryptocurrency chart or another type of chart, including commodities such as gold.

These terms may sound complex and challenging to get your head around, but much like anything in life, the anticipation is scarier than the practical execution. Today we will explain to you what an alligator trading strategy looks like. This includes

  • A stock alligator indicator
  • Alligator strategy forex
  • Alligator indicator strategy
  • Alligator technical indicator

That’s only part of what we will be discussing today. However, by the end of this page, we hope you will fully grasp the idea of an alligator trading strategy and how alligator trading plays out on a live trading desk.

Who Created The Alligator Trading Strategy?

The legendary trader Bill Williams, who sadly passed away in 2019, created the alligator trading strategy. He also developed the idea of several other strategies that professional traders still implement. Throughout his distinguished career, he authored many books about trading and was widely respected in the field.

With over half a century of experience in his expert fields of stocks and commodities, Bill Williams has left a lasting legacy in the trading world. The Bill Williams alligator indicator began to gain serious traction as the man who coined the theory had a decorated and esteemed history in the trading world. Even after his death, the alligator trading strategy is still widely discussed and used by analysts and traders alike.

Who Was Bill Williams?

Bill Williams was born in 1932 and gained expert qualifications in several fields. It was part of this education that allowed him a unique insight into trading. With degrees in psychology and engineering physics, he has identified many new pieces of chart analysis and strategies that professional traders have used for decades.

Williams began to cultivate the idea that strategies were based on human psychology much more so than any method derived from studying chart analysis or theory regarding a specific asset. By establishing that psychology played a leading role in this, Williams identified how this played out on a trading chart and how to execute your trade appropriately. Some traders even refer to this pattern as a William alligator indicator. 

He then went on to provide his knowledge to traders worldwide, visiting every continent and over 50 countries to give back the ability he discovered. As we discussed in our introduction, he had multiple best-sellers. The highlights of his collection were Trading Chaos (first and second editions) and New Trading Dimensions. 

Focussing on the considerable role that psychology plays in trading is now something that virtually every trader agrees with. The impact that negative emotions can have when it comes to trading is phenomenal. Tools that involve risk mitigation, such as automated take profit and stop loss limits and dollar cost averaging, are two ways to protect yourself when the market begins to take a turn.

Managing Risk

For several reasons, you must do ample research on the market you are investing in. First, if you don’t take the time and effort to use considerable resources to understand better the asset you are trading, this is a perilous game. Essentially, if you are investing in an asset you don’t understand, you are gambling.

Applying the risk mitigation tools we mentioned at the end of the previous paragraph is some of the key ways you can help protect yourself in severe market volatility.

What Is The Alligator Pattern?

When applying the alligator trading strategy to your investment strategy, it would be best to identify when a pattern has formed. Before we explain how you can use the alligator trading strategy to your advantage, we will show you what one looks like on a chart. 

Source: https://www.ig.com/en/trading-strategies/what-is-the-alligator-indicator-and-how-do-you-use-it-in-forex-t-210412

As you can see in the chart above, the alligator strategy takes shape in the most literal way. The alligator lips, teeth and jaw all form part of a moving average shape. Dozens of chart analyses take their name from how they shape up on a chart, and the alligator trading strategy is no different.

So What Is An Alligator Chart Indicator?

The alligator trading strategy is set at five, eight, and 13 periods. The indicator applies convergence-divergence indicators to establish effective points of trading. Once this pattern has been established, it is relatively straightforward to use the logic for the raw data. The lips perform the fastest turns, and the jaw performs the slowest turns.

It has proven to be a reliable indicator for decades. Many traders still rate the alligator trading strategy so highly because of how it works, irrespective of the asset class you are trading.

The fact that traders monitor various moving averages in this particular strategy shows that the research and analytical vision of Bill William’s alligator method compromised several different observations. It might seem obvious and not that much of a groundbreaking idea that psychology plays a more prominent role than initially thought. 

However, when Williams devised the alligator trading strategy, he was implementing psychological theory and mathematical analysis to effectively construct a model that traders could use to try and make a profit. Given that so many are still using the alligator trading strategy and we are still writing about it, we would say he devised a pretty solid strategy.

Alligator Indicator Forex

The buying and selling of foreign currencies are one of the biggest markets in the world. With trillions of dollars worth of activity every day, it is one of the most profitable and active asset markets anywhere in the world.

Regarding forex trading, the significant pairings stretch across multiple continents and dozens of countries. Although the primary currency pairings are between seven to ten of the biggest world economies, the majority of which are paired with the US Dollar, plenty of other currencies are also available.

Identifying which pairs reveal an emerging alligator pattern could be the difference between executing a solid, profitable trade and losing your initial investment. However, it is more complex. You could still lose your investment even with plenty of excellent chart analysis and a firm grip on what drives the market.

Because forex is a volatile market, several significant factors are at play, ranging from economic policy announcements to huge world events. Ensuring you are managing risk appropriately while taking on all of these variables will give you ample time to learn how the market works, how it reacts, and how to build a successful strategy that works for you.

Do All Alligator Forex Strategies Look The Same?

Your alligator forex strategy may look different to another trader. This doesn’t necessarily mean either of you is incorrect. The market can be ambiguous and unpredictable. As long as you can justify why you believe it will move in one way and appreciate the factors that cause these volatile swings, you will be thinking like a trader.

An alligator forex strategy may sound complex if you are starting as a beginner in the market. Learning how to identify how to use the alligator indicator successfully is a great first step. You have then completed a significant learning curve in how to conduct thorough and proper market analysis.

Alligator Stock Indicator

As we discussed in our previous section, if you identify the teeth, lips and jaw of the alligator trading strategy, you can effectively implement it across a range of assets. Many analysts and traders will often say that having a diversified portfolio is essential to shield yourself from bearing the brunt of one specific market downturn.

A stop loss is often considered a smart move to protect yourself in a market crash. Although some traders such as Warren Buffett disagree with the psychology behind stop losses. He believes it is a short-term strategy. However, for those of us not working with multi-billion dollar portfolios, mitigating risk is usually a good idea.

How Does An Alligator Forex Indicator Look On A Live Chart?

As a novice trader, how to read an alligator indicator on a forex chart might be a bit of a stretch. You must understand the market effectively before learning more about specific strategies. You can see an example of a forex indicator alligator on the chart below.

Source: https://forex-indicators.net/bill-williams/alligator-indicator 

As you can see, the chart looks the same. It is the shape that we need to pay close attention to instead of the asset. The asset price isn’t relevant as long as you can identify where the alligator chart forms.

Regarding stock trading, it can be easier than a forex pair for some. This is because you only deal with one specific asset and price. However, when it comes to forex trades, you will usually have to weigh the individual factors. Many things will drive the price and how both currencies will interact with each other on a global market. 

Some traders find it easier to trade stocks. Simply because you can buy the asset at one price and sell it at another (hopefully higher) price. Some traders believe there are fewer variables to consider. Both markets require serious knowledge and respect.

However, every trader has their journey and their ideas. There will be plenty of traders who prefer to trade forex compared to stocks. They will have their own reasons why this is the case. In terms of dealing with trade from a novice perspective, you may not enjoy researching a company or its stock.

Irrespective of this, the alligator trading strategy is something you can apply across all assets, and it doesn’t change shape regardless of what you choose to trade.

How To Use The Alligator Indicator

Even though identifying chart patterns is a critical skill for those looking to make it in the world of trading, other variables are at play. You could correctly identify the shape and then execute an effective alligator trading strategy and still lose money because of other market variables. Always manage your risk appropriately and factor in many different variables before entering a trade. 

If you were looking to use an alligator indicator to execute your strategy, it would be a case of viewing it simply as:

When the lines are apart, the “Alligator” is eating. As long as the candlestick stays above or below the alligator, traders will usually remain in the trade. However, when the lines begin to get tight or cross over, that is when volatility arises. Traders who use this technique will consider this cross-over as a sign to exit the trade.

You could spend hours reading through chapters on how this strategy works. However, this is an alligator indicator explained simply. If you identify these alligator indicator settings, you are already placing yourself at an advantage over other novice traders who need more help to grasp chart analysis.

Conclusion

How to read an alligator indicator is an integral piece of any trade. Once you know what to look for and what the signs are, you can look to implement your alligator trading strategy across a broad range of assets.

However, if you are a beginner trader, it is advisable to stick to one asset class and understand thoroughly how it works before you begin to trade another asset. Your capital is always at risk, and if you enter a market without solid prior knowledge, you are already on thin ice. 

An alligator trading strategy might not be the first strategy you wish to employ if you are only starting in the market. Some beginner traders will use more conventional methods, such as swing trading, while they find their feet on how the market works.

We hope you now have enough knowledge to apply this practically to your trading methods and psychology. We have mentioned this already today, but it is essential to emphasise that accurate chart analysis isn’t something you can magically master overnight. 

It takes a lot of time, effort and usually plenty of financial loss before you settle on a strategy that works for you. However, mastering the art of chart analysis will set you well on your way to understanding the market better and give you a better chance of making a more profitable trade in the future.

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