Alligator Indicator - Crypto Academy /S5W3-Homework Post for kouba01

Question 1 - Discuss your understanding of the use of the Alligator indicator and show how it is calculated?

The Alligator indicator is basically a technical indicator that is used for the confirmation of the current price trends in the market and also their primary direction in the market. It is known as a trend-following technical indicator that helps traders trade with the trend. The indicator does this by plotting on the chart three moving average line known as the Jaw (blue line), Teeth (red line), and Lips (green line). By default, the three moving averages have a period length of 5, 8, 13 period length. The Jaw is set at a period length of 13 with an offset of 8, the Teeth is set at a period length of 8 with an offset of 5 and the Lips is set at a period length of 5 with an offset of 3. Bill Williams is the creator and developer of the Alligator indicator. On the Alligator indicator, Jaw, Teeth, and Lips indicate the interaction of the different periods.

When it comes to the alligator indicator, there are terms that are associated with the alligator by Bill Williams. The terms are Alligator sleeping, Alligator waking up, Alligator eating. Alligator sleeping basically means that there is indecision in the market or the market is moving sideways, as the Jaw, the Teeth, and the Lips of the Alligator indicator are closed or joins together. Alligator waking up basically means that there is a trend after the indecision in the market. Alligator eating basically means that there is a trend forming in the market, either bull or bear. Alligator sleeps again basically means that the ongoing trend is ends and the alligator moving average lines closes or joins together.

Alligator Indicator on the AAVE/USDT Chart

Alligator Indicator Calculation

When it comes to the calculation of the alligator indicator, there are different parts that needs to be calculated such as the Median price, Alligator Jaw, Alligator Teeth and Alligator Lips.

MP = (High + Low) / 2
J = MMA (MP, 13, 8)
T = MMA (MP, 8, 5)
L = MMA (MP, 5, 3)

Where;
Median Price = MP
Alligator Jaw = J
Alligator Teeth = T
Alligator Lips = L

The first part is the calculation of the MP (Median Price) of each of each candlestick. To get this, the high and low is added and the result is divided by 2 to get the median price.

The next part is the calculation of the Alligator Jaw. To get this, the MP of 13 periods with an offset of 8 is calculated.

The next part is the calculation of the Alligator Teeth. To get this, the MP of 8 periods with an offset of 5 is calculated.

The next part is the calculation of the Alligator Lips. To get this, the MP of 5 periods with an offset of 3 is calculated.

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?.

Adding the Alligator indicator on a charting platform

The Alligator indicator is one of the popular indicators that comes inbuilt with a lot of the top and popular charting platforms. As always, tradingview remains one of the top and most used charting platforms and the Alligator indicator can be found in the tradingview built-in indicator list. Like every other indicator on tradingview, Adding the Alligator indicator on a tradingview chart is simple when it comes to technical analysis. To do this, I will making use of the tradingview platform https://www.tradingview.com.

On the charting interface, Click on the icon of the indicator. This will open up the indicators and strategies section.

On the indicators and strategies search box library, search for Alligator. This will list all the indicators that has Alligator in its name. For me, I typed in Alligator and selected the first indicator with William Alligator.

The Alligator indicator has been added to the chart

On the Alligator indicator panel, click on the settings.

For the Alligator indicator, the settings has three main sections; input, styles and visibility.

Input - In the input section, there are 6 main parameters; the Jaw length, the Teeth length, the Lips length, the Jaw offset, the Teeth offset and the Lips offset. These parameters can be changed. The defaults input settings are; Jaw is set at a period length of 13 with an offset of 8, the Teeth is set at a period length of 8 with an offset of 5 and the Lips is set at a period length of 5 with an offset of 3. Selecting the reset settings options on the defaults drop-down rests the inputs to the default settings.

Styles - In the styles settings, the look and colours of the various elements of the Alligator indicator can be changed based on individual preferences. The colour, shape and thickness of the different Alligator lines can be changed. Selecting the reset settings options on the defaults drop-down rests the styles to the default settings.

Visibility - What the visibility settings does is that it allows you to basically switch different elements on or off for the chart. By default, all elements are switched on.

For the alligator indicator, changing the default settings is not advisable. The creator of the indicator has chosen the best period length and offset values that suits the Alligator indicator and produce the best results after numerous tests. Also, the values of 3, 5, 8 belong to the Fibonacci numbers and as such, the are key when it comes to the support and resistance. However, the period length can be changed depending on the technical analysis strategy but the default settings has proven to be the sweet spot and produce the best results when using the Alligator indicator.

Question 3 - How do we interpret this indicator from its 3 phases: the period of rest (or sleep), awakening, and the meal phase?

Alligator Rest/Sleep

The Alligator Rest or Sleep basically means that there is indecision in the market or the market is consolidating or ranging. This is seen on the Alligator indicator as the Jaw, the Teeth, and the Lips of the Alligator indicator are closed or joined together or there is an intertwine between the moving average lines. During a ranging market or when the market is in consolidation, there is no visible trend or direction in the market. This means that the buyers and sellers are at an equilibrium. When this happens, traders do not take any position when the Alligator is Resting/Sleeping.

BNB/USDT Chart

Alligator Awakening

Alligator awakening basically means that there is a potential trend forming after the indecision or consolidation in the market. This is seen as the Jaw, the Teeth, and the Lips of the Alligator indicator are wide apart from each together after the phase where it was joined together or closed. When this happens, it means that the Alligator is hungry and is looking for food (trend direction). The direction the alligator decides to hunt for food, indicates the trend direction. This can either be bullish or bearish. The formation of the Alligator Jaw, teeth and lips would indicates the direction of the trend.

BNB/USDT Chart

Alligator Meal/Eating

Alligator having a meal or eating basically means that there is a trend in the market, either bull or bear. The alligator is either eating the bulls or eating the bears. At this phase, traders begins to follow the trend and take profits. Once the alligator has eating enough, it goes back to rest or sleep.

BNB/USDT Chart

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)

The alligator indicator has proven to be a really powerful and effective indicator when it comes to predicting the direction of a trend whether it is bullish or bearish. The 3 moving average lines (Jaw, teeth and lips) of the Alligator indicator helps to indicate the trend direction on whether it is bullish or bearish.

For uptrend, When the three moving average lines – the jaw, teeth and lips are wide apart from each other, and the Lips (green line) is at the top, the Jaw (blue line is at the bottom) and the Teeth (red line) is in the middle and also the price is above the jaw, teeth and lips moving average lines, it means that the trend is bullish or the market is moving in an uptrend.

BNB/USDT Chart

For downtrend, when the jaw, teeth and lips are wide apart from each other, and the Jaw (blue line) is at the top, the Lips (green line) is at the bottom and the Teeth (red line) is in the middle, and also the price is below the jaw, teeth and lips moving average lines, it means that the trend is bearish or the market is moving in a downtrend. This means that the Alligator is awake and is eating.

BNB/USDT Chart

Question 5 - Explain how the Alligator indicator is also used to understand sell / buy signals, by analyzing its different movements.(screenshot required)

One of the main benefits of the Alligator indicator is that it is a powerful indicator that is provides traders with good buy and sell signals and helps traders know when to entry or exit.

The early formation and position of the Jaw, teeth and the Lips moving average lines is a great way to show buy and sell signals. The early positions when the Alligator is awake is a great signal for buy or sell.

For Buy signal, When the Lips (green line) crosses above the Jaw and the teeth and is at the top, the Jaw (blue line) is at the bottom and the teeth (red line) is at the middle, and the price is above the 3 moving average lines, it can be a signal that the trend is about to be bullish or there is a potential uptrend coming. This can be a good early buy signal.

BNB/USDT Chart

For Sell signal, when the Jaw (blue line) crosses above the Lips and the teeth and is at the top, the Lips (green line) is at the bottom and the teeth (red line) is at the middle, and the price is below the 3 moving average lines, it can be a signal that the trend is about to be bearish or there is a potential downtrend coming. This can be a good early sell signal. Traders can make use of the positions of the Jaw and Lips lines to either place in a buy or sell trade.

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)

Yes, the Alligator indicator has proven to be an effective technical indicator for scalping trading. Scalping trading is basically the type of trading where a scalp trader carries out many trades in a day, this is mostly done on very short timeframes. Scalp traders aims to make small profits from each scalping trade and the multiple quantity of scalp trading a day combines to make up good profits. On the shorter timeframe, the Alligator can produce many buy and sell signals, this is effective for scalping trading. On the SOL/USDT chart using the 1 minute timeframe, we can see the different buy and sell signals generated.

SOL/USDT Chart

Question 7 - Is it necessary to add another indicator in order 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

As far as technical indicators are concerned, there are no perfect technical indicator. Every indicator has weaknesses and as such provides false signals. The Alligator indicator is no exception and even though it is a very powerful and effective indicator in identifying trends and providing buy and sell signals, it is also known to provide false signals as well. That is why it is advisable to always make use of the Alligator indicator in combination with another technical indicator to filter out false signals. The Alligator indicator can be combined with the MACD indicator for signal confirmation and filtering false signals.

For buy signal confirmation with combination with the MACD indicator, when a buy signal is generated by the Alligator indicator, the MACD indicator can confirm this signal by position of the MACD line and signal line in relation to the zero line. When the MACD line crosses above the signal line and is rising above the zero line, it is a strong indication of a possible uptrend move or bullish trend.

For sell signal confirmation with combination with the MACD indicator, when a sell signal is generated by the Alligator indicator, the MACD indicator can confirm this signal. When the MACD line crosses below the signal line and is falling below the zero line, it is a strong indication of a possible downtrend or bearish trend.

For false signal filtration, when the Alligator indicator has provided a buy signal but the MACD indicator is still moving below the zero line, it can mean that the market is still bearish. With this, the trader can avoid going long or taking a buy position.

Question 8 - List the advantages and disadvantages of the Alligator indicator

Advantages

• The Alligator indicator is a really easy and simple indicator to make use of when it comes to identifying trends in the market.

• Because it is based on moving averages, the false signals are minimal

• It is an effective indicator that can provide very good buy and sell signals. However, combining it with another indicator like MACD, ADX indicator or other strategies can provide more quality buy and sell signals.

• The Alligator indicator gives traders the freedom to use it on any timeframe on the chart.

• The Alligator indicator has proven to be a very effective indicator for scalping trading

• The use of relatable terms like the Jaws, Teeth, Lips, Alligator sleeping, Alligator awakening and Alligator eating makes it one of the easiest indicators to learn and understand especially for beginners.

Disadvantages

• Even though the Alligator indicator provides good signals, it is also known to provide false signals.

• The lagging nature of the indicator makes it provide late signals

• When the market doesn’t have a clear direction or is consolidating, the Alligator indicator is less effective

Conclusion

The Alligator indicator is without a doubt one of the top technical indicators that is used by a lot of traders for trend identification. Aside the indicator being very powerful and effective in providing buy and sell signals in the market, it is also very easy and simple to understand and use, this makes the indicator very popular among a lot of traders. Finally, even though it is a very effective indicator in identifying trends and providing buy and sell signals, it is also known to provide false signals as well. That is why it is advisable to always make use of the Alligator indicator in combination with another technical indicator like MACD to filter out false signals.