Pinnacle Forex Group

Forex Alligator:

The alligator indicator is one of the more basic indicators that we use as an introduction to moving averages and how traders use them. Even though the Alligator is basic it is a great tool for short term and immediate trading analysis. What we need to do is simply go over how to trade with it and what it does for us in our longer term strategies.

The alligator is simply a combination of three moving averages. The reason we call it the alligator in the forex industry is simply because the three moving averages resemble an alligator’s mouth. When the mouth is open this signifies that there is strength and momentum in the market; it eats the bull candles (cute huh?) The opposite is true when the mouths are closed; this signifies that the trend is weak or choppy (it eats the Bear Candles.) When we are deciding to take a trade we want to make sure that the mouth is open in one direction or another. The indicators will confirm that we are following a trend but also will give us clues as to where and when the markets will start to reverse or correct a run.

There are several ways to plot this indicator you on your charts; one, simply open your navigator window, expand the custom indicators menu then double click on the alligator. A small menu box will appear where you can change or adjust the parameters.

For now let’s just make sure that you apply the visualization to the M1, M5, M15, M30, H1, and H4 time frames.

Once you have finished with that you can also choose to adjust the thickness of the lines by clicking on the “colors” tab. Once you have made that adjustment simply click OK. Your charts should look like the ones below.

The blue moving average (the jaw or 13 moving average) is the most significant of the three moving averages. The easiest way to remember this is that when the candlestick is above the blue line you buy and when it is below the blue line you are looking to sell. As the market approaches the blue line of the Alligator you will anticipate the Blue line acting as a barrier and the candle having a hard time breaking through it. It’s not always going to be the case but if we anticipate the candle not being able to break through we will be much safer in the long run. Just like in the example above; many times the candlestick hit the Alligator (one of the three lines) and it couldn’t break them so it fell back down. When the candles are below the Alligator, that green line you see will be the one that acts as resistance, when the candles are above the blue line that green line will be acting as support. Even though the candles are below the blue line and keep moving up and down, every time they try to move up they hit the green line and fall right back down. The markets will continue to drop and follow that Alligator until it actually breaks it, just like what eventually did happen on this chart it looks like around Feb. 19th. As the market broke the green line at the bottom on around the 18th, then eventually about 4 hours later the blue line, we can see that the blue line acted as a support before the long candlestick made a jump upward, just after we got into the buy. Now once that break through happens, we will expect the exact opposite scenario again to happen. A barrier preventing the markets from moving upward will typically become a barrier preventing the markets from moving downward. We will then be looking to see what happens, if the candle hits the Alligator we will see if there is a bounce off that line or a break. A bounce off the Alligator would warrant a buy position up to the next level of resistance. If it breaks below the Alligator we will expect to see the market to head down again until it hit support.  

The biggest key here and best place to trade is when you find a candle close above or below blue line, again at the point where we see a candle close above you should be looking for a buy position or a long. Or on the flip side when it breaks downward we will be looking for a sell or short.

To just recap in case you got lost somewhere. The blue is the important one because that 13MA is your short term buy and sell position; remember when we are above it we buy and below it we sell, or look for buys or sells.  The green one is almost as important because when it crosses the blue line we are looking for a decent movement and when they are flat (sitting on top of each other) we are looking for a break through to one side or the other. That that part we talked about where the Alligator is running flat; it will look like they are literally on top of each other. That sort of alignment is referred to as a “sleeping Alligator.” When he awakes he will be hungry and want to eat. We can expect a nice buy or sell position there so be careful.  If when the Alligator awakens and a candle closes above the blue line remember we are in a buy position, if it closes below we are in a sell position.

During the course of the candlesticks doing their up and down movements, we can expect that once the candle breaks and ends below or above the Alligator that we will see a retest. This simply means at sometime the candle will try to head back to the Alligator and test its strength to see if it can break. If we look at Feb 16th we are below the Alligator so we are still entering sell positions but you can see how for an entire day it is hitting the green line and dropping down. That sort of movement is normal. When looking at it from that perspective you can say in a sell (a short) the green line will act as a resistance level and push the market further down, be careful of that, too many times people think that since they can see a bullish candle that the market is reversing and they get caught in a bad trade. Although, when we are in a buy (a long) we can plan on the opposite rule, the green line will act as if it is a support level and push the market’s upward; we can expect a bounce off that line and a continuation of the trend. Either one of these cases may result in some great trading potential.

Practice this technique until you are comfortable. Expect missed trades here and many more questions.