Hello everyone, welcome to week 3 of this season's lesson series. The lesson taught by professor @kouba01 discussed Trading Crypto using Alligator Indicator. In this post, I will be responding to the assignment given.
Question 1
Discuss your understanding of the use of the Alligator indicator and show how it is calculated?
The economy of the entire world is not good ever since the global pandemic stroke the world. People have sought an alternative way of making money currently. So many people have gotten involved in so many things. The world now knows the importance of cryptocurrency.
Every day thousands of people enter the crypto world currently to trade so that they can make a profit and use the money to solve their problems. So many have tried to make a profit but to no avail. Trading has two ways, fundamental analysis, and technical analysis. Fundamental analysis has a lot to the token previous data.
The technical analysis is made up of indicators, patterns, and market structure. Technical indicators have proven for years to be reliable. They are different types of indicators in the market for different reasons. Some indicators are used to check the volatility of the environment, to check the entry and existing point and so many other trading indicators.
The technical indicator includes RSI, stochastic oscillator, MACD, Bollinger Bands, Average true range, and others. But for today we will be looking at Alligator Indicator.
Alligator indicator is a technical indicator that was developed by Bill Williams, which is used widely in the market today because it is very easy to understand and it has a very strong visual impact, and can be used by everyone once you understand it. Alligator Indicator is used to know the trend of the market and you can also be used to know your exact entry point and exit point.
Bill Williams got the alligator indicator from animals and how they behave in the market. He said that the Crocodile sleeps, the longer it sleeps the hungrier it becomes, and when the crocodile wakes up, he looks for what to hunt to survive. This is synonymous with the market pattern
This is a chart of the Alligator indicator.
From the chart above we can see that the concept of the sleeping crocodile, when the market is ranging it signifies that the crocodile is sleeping, but when it is ranging, the crocodile is awake and ready to hunt. Let's quickly look at the features of the alligator indicator. Alligator indicator is made up of 3 moving averages
Alligator’s Jaw: this is the first moving average, it is colored blue, it is very slow when compared to the other three moving averages. It has a period of 13 and it moves ahead by 8 bars. whenever the candlestick in the market goes above it, it is an indication of an upward trend.
Alligator’s Teeth: this is the moving average with the red color that is situated in the middle of the alligator indicator, it has a period and its movement into the future is by 5 bars. If the alligator’s teeth are above the alligator’s jaw is a confirmation of an upward trend.
Alligator’s Lip: This moving average is the closest to the market price, it is colored green, with a period of 5 and it moves 3 bars into the future, and from indications, it is the fastest of the 3 moving averages.
We can see how the alligator devours its prey using its jaws, teeth, and lips. Whenever the price is above the alligator ti is an indication of an uptrend but if the price is below the alligator is an indication of the downtrend. If you notice that moving averages are very close to each other, then you need to know that the alligator is as sleep.
HOW THE ALLIGATOR INDICATOR IS BEING CALCULATED
Alligator’s Jaw = SMMA (Median Price 13, 8)
Alligator’s Teeth = SMMA (Median Price 8, 5)
Alligator’s Lips= SMMA (median Price 5, 3)
Median Price = High + Low/2
Note: SMMA =Smoothed Moving average Median price. For instance the Alligator’s Jaw indicators a moving average period of 13 and it has a shift bar of 8 ahead and so does other have.
Question 2
Show how to add the indicator to the chart, How to configure the Alligator indicator, and is it advisable to change its default settings ?. (Screenshot required)
These are the steps you need to add the alligator indicator to the chart
Open your tradingview, then select Indicator and search for William alligator.
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The Alligator indicator will appear automatically on the screen of the chart.
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Then click on the gear icon at the top of the bar
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Then you can manually adjust the setting to suit your desire.
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You can also change the style with deals with the different colors, which you can also adjust to your taste
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You can also change the visibility settings to also suit you.
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Question 3
How do we interpret this indicator from its 3 phases: the period of rest(or sleep), awakening, and the meal phase?(Screenshot required)
From Williams's explanation of the Alligator indicators, it has 3 phases, which are sleep, awaken, and eating. These are what the alligators do basically in their real life.
Sleeping Phase: The sleeping phase occurs when the market is ranging or consolidating, at this point the 3 moving averages will be very close to each other or they will even entwine with each other shows you that the alligator is fast asleep. At this point, there is no neither bullish nor bearish trend in the market. So forget that after sleeping, for some time, the alligator wakes up and looks for what to hunt. The Alligator uses its sleeping time to accumulate momentum for its next trend in either direction of the market.
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Awakening Phase: After the market might have slept for a very long time, gathering momentum or energy for the next trend. The awakening phase occurs when the price of the market begins to accumulate momentum for the next phase. This phase normally shows the trends of the market initially. The direction of the trend is determined by the crosses made by the moving averages. The movement of the moving averages starts from the lips to the teeth and then to the slowest which is the jaw.
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Eating Phase: The eating phase is the final phase of the alligator's indicator, this phase completes the cycle of the alligator indicator. After the alligator might have caught its prey, it is time to eat it. After the awakening phase which deals with knowing your trend. At this point, the 3 moving averages will separate from each other, at the point the direction of the trend is known and it will begin to move in that direction with full force. At this point, the alligators show the trend direction clearly. This phase completes the cycle and after the alligator might have eaten enough, he tends to sleep again and get awakening before eating another food, he repeats this process every time.
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Question 4
Based on the layout of its three moving averages that make up the Alligator indicator, how can one predict whether the trend will be bullish or bearish (Screenshot required)
Using the 3 moving averages, you can predict the direction of the trend, using the Alligator’s lips, which is the fastest and as it is the fastest, it shows the trend direction first before any other indicator.
For you to properly know when it is time for a bullish trend, the green line which is the Alligators lips will be above all the other two indicators and followed by the red line which is the Alligator’s teeth being at the middle, then comes the blue line which is the Alligator’s jaw will be below all of them. It is advisable to enter the buy order early once you have noticed the price movement in that direction.
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For a bearish trend, the position of the Alligator’s lip, which is the green line moving average is a change to being below all the other moving averages, the Alligator’s teeth which is the red line still maintains its middle position, while the Alligator's jaw, which is the blue line is above all the other moving averages.
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Question 5
Explain how the Alligator indicator is also used to understand sell / buy signals, by analyzing its different movements. (Screenshot required)
The understanding of the moving averages tells us whether it is a buy or sell signal we are heading for now.
For Sell Signal: Sell is identified when the moving averages cross each other with the Alligator’s lip (Green moving average) being at the below all of them, while the Alligator’s teeth(Red Moving averages) being at the middle and the Alligator’s jaw (The blue moving average) at the top of all the other moving averages and all the moving averages are all parallel to each other. And we should note that the direction of the trend is tending toward a downward direction.
For Buy Signal: Buy is identified when the moving averages cross each other with the Alligator’s lip (Green moving average) being at the above all of them, while the Alligator’s teeth(Red Moving averages) being at the middle and the Alligator’s jaw (The blue moving average) being at the bottom of all the other moving averages and all the moving averages are all parallel to each other. And we should note that the direction of the trend is tending toward a downward direction.
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Question 6
Do you see the effectiveness of using the Alligator indicator in scalping trading style? Explain this based on a clear example.(Screenshot required)
When the Alligator indicator is ranging or consolidating, it is said to be sleeping. During such times that is no trend, no bullish or bearish trend is being known at the point. At the points, trading seems impossible for most traders, but some traders take advantage of this opportunity, they are known as scalp traders. The Scalp traders either buy or sell during the ranging market, and this is what is called the range scalping
The traders use the Alligator indicator which serves them the support and resistance, the Alligator’s jaw serves as the support and the Alligator’s lip serves as resistance whenever they want to make a buy order.
But for sell order, the Alligator indicator also The Alligator’s jaw serves as the resistance and the Alligator’s lip serves as support whenever they want to make a sell order. This is a wonderful opportunity to use the Alligator indicator on the scalp.
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Question 7
Is it necessary to add another indicator for the indicator to work better as a filter and help get rid of unnecessary and false signals? Use a graph to support your answer.
One single indicator can not give you correct analysis, but when paired with another indicator, your chances of being successful in the market become very high. This is called confluence where you combine more than one indicator to give you a wonderful outcome.
I will be using the Alligator indicator with the Relative strength indicator popularly known as the RSI.
The RSI and the Alligator indicator combination is great, I noticed that it helps give you the correct entry point and also filter some entries which might be false.
For the setup for a buy entry point, the Alligator should be about to begin a bullish trend with the alligator’s lip on top of all the other moving averages and the Alligator’s teeth in the middle, and the alligator’s jaw below, which tends to be moving upward, then the RSI should be on the Oversold position to give you an accurate entry position for a buy order. The screenshot can be seen below.
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It can also be used to spot out false entry point, the Alligator correct the RSI in most cases. Take a look at the example below;
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Question 8
List the advantages and disadvantages of the Alligator indicator
Advantages of the Alligators indicators
It can be used to determine the market trend at any given timeframe
It can also be used to correct false signals in other indicators, as we have seen in RSI
The Alligator indicator is very easy to understand and use at the same time, anyone can make use of it
This indicator gives an accurate entry position for both buy and sell entry
The Original setting performs wonders and traders don’t need to make any form of adjustment
Disadvantages of Alligators Indicator
The indicator is lagging, action might have taken place before you execute it
It cannot be used alone, so you need to study another indicator to make it work perfectly
It can be hard for it to be profitable in a ranging market.
Conclusion
Alligator is a wonderful indicator that anyone can use but before using it, you need to understand the Alligator’s jaws, alligator’s, teeth, and the alligator’s lip properly. Also, know the 3 phases of the alligator. Know when the alligator is asleep, when it is awakening and when it wants to eat. Understand when it is about to be used for a trending market both the bullish and the bearish.
The indicator can be used in all time frames both for stock, cryptocurrency and even on the forex market. It generates a great signal. You can get it a try today and become more profitable in the market today.
Thank you professor @kouba01 for this educative and insightful lesson.