If you’re one of the many who’ve jumped on the Forex trading bandwagon, you’ll want all the info you can get that will give you any sort of advantage.
One of the most useful recommendations is to use the indicators that your Forex broker provides.
Today, I’m going to talk about the Alligator Indicator. It’s as much fun as it sounds.
What is the Alligator Indicator?
The Alligator Indicator is a trend indicator devised by Bill Williams. If you haven’t heard the name, he’s a well-known trader, technical analyst, and author, and he’s come up with something special.
He uses the alligator as an analogy to describe some of the behaviors of the market. When there is no upwards or downwards trend, the market is like a sleeping alligator. But the alligator will eventually wake up and, depending on the length of time it was asleep, will be hungry. When the sideways trend ends, in other words, you can expect a very pronounced trend in either direction.
How does it work?
The Alligator Indicator therefore shows you the structure of the market. It uses three moving averages to do this. These are called balance lines, and they’re made up of the different parts of the alligator:
- Alligator’s jaw – the slowest moving, colored blue.
- Alligator’s teeth – coloured red, moving faster than the jaw.
- Alligator’s lips – colored green, the fastest of the balance lines.
This might sound confusing, but when working with MetaTrader, which is inevitably the platform your Forex broker will use, it becomes clear. The indicator is used to show you the structure of the markets and it does just that instead of just giving you numbers out of context.
What does it indicate?
The Alligator indicator indicates 3 pieces of information about the structure of the market.
- the absence of a trend: this is when the alligator is sleeping, a common state of the market. It’s dormant, and we can only wait for it to “wake”.
- formation of a trend: this shows you when the alligator is waking. It indicates how big the trend is expected to be, based on the length of the market’s dormancy.
- direction of the trend: finally, it indicates which direction the trend is beginning to move in. You already know how big the trend will be, but that information is useless without knowing which way it will go. This piece of information completes the bigger picture, and readies us to make a decision.
The Alligator Indicator is great, but it’s only one of many useful tools. Using indicators correctly will keep you on top of a great trading strategy, but none of them are perfect alone. Use the Alligator Indicator along with others, such as the Momentum Indicator, or the A/D Indicator.
This way, you’ll improve your chances of earning money and living comfortably with an extra source of income.