Today’s Trading Talk is the start of a multi-indicator strategy where Rey starts with the Alligator indicator.
This indicator, created by Bill Williams, is based on the idea that the market is always trending, either up or down, but can also be ranging. The Alligator indicator helps traders identify trends and potential reversals in the market.
What is the Alligator indicator and how does it work?
The Alligator indicator consists of three lines, which are known as the Jaw, Teeth, and Lips. These lines are displayed on the price chart and move along with the price action.
The Jaw is a blue line and is typically set to a 13-period simple moving average, shifted 8 bars into the future.
The Teeth is a red line and is typically set to an 8-period simple moving average, shifted 5 bars into the future.
The Lips is a green line and is typically set to a 5-period simple moving average, shifted 3 bars into the future.
When the Alligator lines are entwined, it indicates that the market is ranging.
When the Alligator lines are diverging, it indicates that the market is trending, either up or down.
The direction of the trend can be determined by the order of the Alligator lines.
If the Jaw is above the Teeth, and the Teeth is above the Lips, the market is in an uptrend.
If the Jaw is below the Teeth, and the Teeth is below the Lips, the market is in a downtrend.
The Alligator indicator can also be used to identify potential reversals in the market.
When the Alligator lines start to converge, it indicates that the trend is losing momentum, and a reversal may be imminent.
Traders can look for confirmation of a reversal by using other technical analysis tools, such as support and resistance levels, candlestick patterns, or other indicators.
If you would like to learn more about creating automated trading strategies check out the Trading Talk series which has a new episode each week with different topics and concepts on popular automated trading strategies.
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