How to trade using the Alligator Indicator
The Alligator indicator helps to confirm the presence or absence of a trend as well as its direction. For an uptrend the bottom will be the blue, then red, then green on top. It is the opposite for a downtrend: blue on top, then red, then green on the bottom.
If the lines are crossing or are moving close together the Alligator has its mouth closed. Traders should not open new trades as any trends have finished.
When the lines start to move apart, a trend could now be possible, the order of the colours would determine which direction it is moving. Generally, the longer the lines are close to each other and crossing indicating no trend, the stronger the proceeding trend will be.
Elliott wave traders can use Alligator as a helping indicator to identify impulsive and corrective waves: when price trades outside Alligator’s mouth, the impulsive wave is forming, when price trades inside Alligator’s mouth, the corrective Elliott wave is forming.
The Alligator indicator consists of 3 Moving averages which are projected into the future by varying amount of days:
Alligator’s jaws (blue line) – 13-period Simple Moving Average built from (High+Low)/2, which is moved into the future by 8 bars;
Alligator’s teeth (red line) - 8-period Simple Moving Average built from (High+Low)/2, which is moved by 5 bars into the future;
Alligator’s lips (green line) - 5-period Simple Moving Average built from (High+Low)/2, which is moved by 3 bars into the future.