Practice shows that the longer a financial asset is traded in a narrow range, the stronger (and more profitable!) is its following directed movement. Trading strategy Alligator is based on the eponymous indicator and lets you catch the transition from "hibernation" to active trend and take its maximum profit.
The most reliable trading systems are always those whose signals even at a large number of indicators can’t be double- (or multiple-) edged. Bill Williams managed to create a simple and productive strategy from a set of moving averages and a standard fractal, where trading is conducted only during a trend, and money can’t be lost on false signals during the flat.
Today Alligator strategy is used in conjunction with other tools, but even one major indicator allows you to enter the market at the beginning of a strong movement and hold the deal before it ends.
The principle of operation of the strategy and basic requirements
Alligator indicator interpretation involves two market states.
- Flat – the indicator lines intersect, the price fluctuates around the lines (it is believed that the "Alligator sleeps"). Usually, additional indicators at this time also show the flat state.
- Trend – lines are arranged in the direction of the trend (bullish – up, bearish – down) in a specific order (Alligator "opens mouth"). Additional indicators are also activated.
The fastest MA(5) (green) is first to react to the enhancing market – the line begins to reverse in the direction of a new pulse. If the pulse continues and influences the price, it is followed by the reaction of the red line of MA(8) – a turn in the same direction. The slowest MA(13) reacts the last – a blue line of the indicator.
At the change of the initial direction, there should be a consistent intersection: first the green line crosses the red, then they together cross the blue and then fully reserve.
Moment of reversal is a signal for the possible opening of transactions.
Important: Alligator strategy is very sensitive to the timely exit from the transaction and to the rules of money management.
The first such signal is the fact of price reversal and crossing Alligator lines; in this case, it is recommended to close the deal manually without waiting for the stop. More loyal exit from the market can be closure by a signal of additional indicators (MACD, AO, Stochastic, Awesome).
Installing and configuring the indicators
All proposed indicators are standard for a trading terminal and are installed with the current settings. Special settings may be required only when using the Stochastic Oscillator for high-volatile tools.
General look of the additional indicators:
The main Alligator indicator consists of the readings of three moving averages:
- balance line of a greater timeframe (blue) or "Alligator Jaws" is a smoothed MA(13), offset forward by 8 bars;
- balance line for the previous meaningful timeframe (red) or "teeth" is a smoothed MA(8), offset forward by 5 bars;
- balance line for a small period (green) or "lips" is a smoothed MA(5), offset forward by 2 bars.
Application of strategy in trading
The system is recommended for any average volatility instruments, the period: to confirm the trend – not less than H1, to find the entry point – M15 and above.
The simplest Alligator strategy for H4
If you strictly act according to the following rules, the profit is guaranteed. Work only on Alligator indicator. We’ll reveal the rules and then specify to which indicator line they apply, first the indicator line will be called the base. So,
- Buy – a candle intersects the base line upwards and closes above the intersection point.
- Sell – a candle crosses the base line downwards and closes below the intersection point.
- Stop-losses are set at the min/max of the breakthrough candle, then you can move the stop along the selected line of the indicator.
- Exit from the deal: a candle breaks the base line of the indicator in the opposite direction and closes below / (above)
Important: H4 period is a prerequisite of a strategy, otherwise the market noise is not cut off and signals obtained are unreliable. Stops at such tactics are required.
The choice of the base line depends on your type of trading under the Alligator strategy:
- for aggressive, we take the green line (the fastest), it allows you to take maximum profit, but has a high risk of reversal;
- for moderate is the red line, it will bring an average profit but trading is calmer;
- for calm is the slowest blue line, it allows for long transactions with virtually no loss.
You can combine: enter by fast line, exit by the medium or slow.
Alligator Strategy + Fractals + MA(233) + Stochastic Oscillator
First, we add the fractals indicator to the usual Alligator. General recommendations, if there is a signal of market transition to active movement:
- Do not enter a trade before the first fractal that appears above (or below) all the three lines of "Alligator". For the Alligator strategy, this would mean that the price has really broken through the range of flat, rose above (or lower) its boundary and had a technical pullback. Fractal shows the min/max of the breakthrough.
- This first fractal is the level of the first entry, but the deal will be opened when the price after the pullback crosses its price level the second time (2-3 points above/below).
- If a fractal is formed inside the interlacing lines, ignore the signal.
After the opening of the first transaction, you can use each subsequent fractal for additional buy/sell, reasoning similarly – enter after the breakthrough of the previous fractal.
As long as the price is above the Alligator interlacing lines, we only enter the buy (using fractals up). If the price is below the line, we open only sells (fractals down).
Sometimes, the system adds the long MA(233) in order to better divide the trend: while the price is above MA(233) – buy, below – sell.
Modern volatile market requires additional filter for false signals – add Stochastic Oscillator to the Alligator strategy.
- if Stochastic confirms the downward movement, i.e. it first grows above the 80 level (overbought) and then falls, then at all other signals we open the deal to sell.
- if Stochastic gives the signal for upward movement, i.e. after the fall below 20 (oversold) it grows again, then at all the basic conditions we open the deal to buy.
Important: you may close trades manually instead of setting stops on small periods when receiving obvious signals from the additional indicators or according to the principles of money management.
And as a conclusion...
The proposed system shows that trendy tactics always bring a steady income. The Alligator strategy is, of course, not new, but like any classical system, it is profitable, especially over long periods. Traditional lagging of the moving averages is successfully compensated by the mutual offset of the indicator lines. When confirming the trend for a longer period and supplemented with oscillator, the strategy is quite applicable to the timeframes from M15 to H1, and at a reasonable capital management it allows to reliably take up to 60% of movement from any trend. Source: DewinforexSocial button for Joomla