Good day, and welcome to my page. This is another homework given by our noble prof @kouba01 and I'm glad to be a part of it. Let's go straight to the Alligator indicator and see what I've learned from the prof.
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Question 1
Discuss your understanding of the use of the Alligator indicator and show how it is calculated?
The alligator indicator was developed by Bill Williams, and it consists of 3 indicators. This indicator is considered as a smooth simple moving average because it's simple to use compared with the exponential moving averages and the weighted moving averages. The William alligator indicator was designed to help traders note a trending market, and also identify a good and bad signal
The indicator consists of three lines which are the blue, red, and green lines. These three lines are the moving averages and they have a specific name based on the name of the indicator represented by an animal. The blue line stands for the jaw of the alligator. The red line is the Teeth and the green stands for the lips. The indicator also helps to determine the exit and entry point in the market
The alligator indicator calculation
To calculate the alligator indicator, and most other technical indicators, knowledge of mathematics is needed because the calculation is based on different periods. For the three lines, there are different periods Williams explained
The Lips (green line) which is considered as the shortest moving average is a 5-period moving average, and its adjustment is shifted over the last 3 periods
We have the teeth (red line) of the alligator as the second moving average and is an 8-period moving average shifted 5 periods to the right.
The jaw (blue line) is the largest of the three moving averages. It's a 13-period moving average, with an adjustment of 8 periods to the right.
Let's see the calculations proper
The median price is calculated as follows,
High + Low/2
Lips = SMMA x (Median price, 5, 3)
This means we have the median price of 5, shifted to the front by 3 periods. One period represents a candlestick.
Teeth = SMMA x (Median price, 8, 5)
This means we have the median price of 8, shifted to the front by 5 periods.
jaw = SMMA x(Median price, 13, 8)
The SMMA means Smooth Simple Moving Average
This means we have the median price of 13, shifted to the front by 8 periods.
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)
I will be using Tradingview for this
The first thing is to log in to the trading view platform, then click on the Fx as shown below to get the page where the Williams indicator would be located
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Type Williams indicator in the search option and click on it when it appears.
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Is it advisable to change its default settings
From what I learned from the prof, I think it's advisable to change the default settings as a learner to experiment for more understanding of how the indicator works at various levels of changes. As we must have noticed that the default settings by Williams are
5-period green line with adjustment of 3 for the Lips
8-period red line with adjustment of 5 for the Teeth, and
13-period blue line with adjustment of 8 for the jaw
These numbers are also regarded as Fibonacci numbers, which means we can also use other Fibonacci numbers to experiment and see how the Williams indicator would play out
The Fibonacci numbers are always added to the next number to get the current one and it starts from zero and 1 and it goes like that till eternity. See how it goes below
0, 1. That's the first two numbers, so 0 + 1 = 1. Therefore the next number is 1
We now have 0, 1, 1. To get the fourth number, we would add the second and the third number
1 + 1 = 2, so the fourth number would be = 2, so now we have
0, 1, 1, 2.
The third number would be added to the fourth number and we have 1 + 2 = 3, which would result to
0, 1, 1, 2, 3. It continues like that in sequence.
0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, 89, 144, 233, 377, 610, 987, 1597, 2584.........
We can experiment with all these numbers to understand more about the Williams alligator indicator, but we should understand that the period is always greater than the adjustment. We can use
13-period line with adjustment of 8 for the lips (green)
21-period line with 13-period adjustment for the Teeth (red)
34-period line with adjustment of 21 for the jaw (blue)
Or
55-period line with adjustment of 34 for the lips (green)
89-period line with an adjustment of 55 for the Teeth (red)
144 periods line with an adjustment of 89 for the jaw (blue)
We can also do it for lower Fibonacci numbers like 2, 3, 5, 8, or 1, 2, 3, 5. We can keep counting. Once we get the best that we believe would work for us more, from the experiment, we can employ it as part of our trading arsenal
With respect to the examples given above, we can have the adjustment as given below by changing the default settings.
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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)
With the explanation, by the prof, I remembered when I used to visit the amusement park near our house when I was very young. The alligator in a small pool would lie near the pool and close his eyes without shaking. Even if throw a stone to hit him, he would not shake. The alligator can remain in that state for 4 hours. Immediately it wakes up, it would craw to the pool (the shallow part) and open its mouth. This time, birds would fly over his head several times and some would patch on his back. The moment any of the birds mistakenly fly across his mouth, that's all. He would instantly catch and devour the bird. It was a great scene and I love watching it back then
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In relation to the phases, the period of sleep of the alligator is when he's not active. When the market isn't making any move either up or down and remains in one state, it's the period of sleep, and we can detect this when the alligator lines converge and closely together. This state is when a trader should be patient not to enter the market because the direction of the price movement is not predictable, which means the market is ranging and there can either be an upward or downward movement at any time
The awakening period is when the alligator comes back from sleep and is ready to have lunch dinner or breakfast depending on the time it comes awake. At this point, the market is looking forward to making a move. The more hungry the alligator is, the more prey it would devour, so in light of this, traders can buy or sell depending on the crossover of the alligator lines and take their profit before the alligator goes back to sleep. Let's see an example below
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When the alligator wakes, we can see that it goes bearish and eat up the market. traders can make a profit from this in the forex market if they follow the right trend, and we can say, the traders are also eating as they get some dosh to their wallets. So when the traders make a profit, it is regarded as the meal phase, and that is when the alligator is eating its prey to satisfaction before going back to sleep
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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)
Predicting the bearish and the bullish movement of the market depends on the crossing of the three alligator lines, and which line stays at the top and at the bottom. To predict an uptrend movement using the alligator indicator, the green line would be found at the top while the blue line would be below. When this happens, it's a signal that there is likely to be a bullish movement
As per the bearish movement prediction. It's just like a change in hands or we can call it a switch. When the blue line crosses the other two lines to the top and the green line crosses to the bottom, it's an indication of a bearish market. The price would start moving downward at this point as the alligator keeps going in a bearish direction with the blue line and the green line stays at the top and down simultaneously until there's a change in trend, or when the alligator goes to sleep. The image below shows the bullish and the bearish movement of price with respect to the green and blue lines
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From the image, the green line (lips) is at the top, while the jaw (blue line) remains at the bottom, and this is a bullish confirmation. On the contrary, we can also see the blue line crossing to the top and the green digressing downward, and this brought about a bearish movement. So the crossing of the green line to the top and the crossing of the blue line to the top is the determinant of the bullish and bearish trend
Question 5
Explain how the Alligator indicator is also used to understand sell/buy signals, by analyzing its different movements. (screenshot required)
The buy and sell signal can be spotted when we understand when there's likely to be a bullish or a bearish movement in the market. Like I previously mentioned, when the green line crosses to the top leaving the red line at the middle and the blue line below, upward movement is imminent, and when the blue line takes over the top space leaving the red at the middle and the green at the bottom, bearish movement is on the way
So with this understanding, a trader can enter a trade when the line crosses in either way (blue or green line). But to be certain of the trend, a trader can wait and see how a few candles build before following the trend. Let's see the image below
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This is when the bullish signal is identified. The crossing of the green line to the top tells us that we can buy and wait for the right time to sell and the right time is when the blue line is gradually crossing the red line to the top to take over and the green crosses down. This time, we can sell
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)
I think it's possible to use the alligator indicator for scalping. Since scalping trading is carried within a few minutes all to make a profit within the small time frame. As the market fluctuates, we can use the alligator indicator to enter and exit a trade multiple times by quickly taking our profit before there's a reversal
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As the line show the movement of the trend within the short period or interval, we can take advantage and scalp trade. But it's important to be vigilant and exit on time before the trade goes against us. I think scalp trading with the alligator indicator makes a lot of sense. It's only left to the trader to utilize the indicator wisely
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 explained by the prof, the gator indicator can work as a filter that can get rid of unnecessary signals. This means that it's okay to add another indicator to support the alligator indicator in getting the right signals and filtering the false ones. But in my opinion and according to the indicator I understand, I would [prefer to use the RSI with the alligator indicator
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From the above image, the RSI indicator shows the level of oversold and overbought. When the RSI indicator is used with the alligator indicator, it's easy to spot the next trend because when the RSI line moves very close to 70 or above, there's a high probability that the price would reverse, and looking at the behavior of the alligator at that point would be a double confirmation that the market is going to go bearish. So with the two indicators pointing in the same direction, we can be to a reasonable extent sure of a reversal
Conversely, when the RSI moves below 30, and the alligator (the green) takes over to the top, we can say the market would go bullish because there's a double confirmation as well. So with the use of other indicators with the alligator indicator, false signals can be filtered and we can have a better market prediction
Question 8
List the advantages and disadvantages of the Alligator indicator
Advantages
The alligator indicator can be used to pinpoint the support and resistance areas, and this can help scalp profit in a short time movement.
It helps from placing a bad trade because most times, when the blue or the green line crosses the red line and crosses back without going further, it's an indication of a fake cross, so a trader can lay low for the right signal to set in.
It's possible to easily spot when the market is going up or down from the green and blue line crossing to the top and below.
Disadvantages
The market volatility can cause the indicator to give a fake signal and if the trader is not conversant with the trick, there might be a loss.
The ranging market might be confusing. I saw instances where the line crossed but there was neither bullish nor bearish movement. In this wise, the alligator in the state of sleep can pretend to be awake but still asleep.
Question 9
Conclusion
I see the alligator indicator as a tool that is very easy to use because of its flexibility. It's straightforward and not difficult to read, unlike other indicators that have tedious calculations and various rules and rules of lines that would make you focus for ages sporting a trend. However, it's always good to use other indicators with any indicator of our choice for a better prediction. Thanks to the professor for this excellent topic and lectures. Much appreciation as we learn through
@kouba01 (the crypto prof)
Thanks for reading.
This is ckole the laughing gas.
One love.