Introduction

Hello, good to see you all on this week3 lecture for season5. Here is my assignment after reading this interesting lecture by Prof. @kouba01. Thank you for reading my assignment

QUESTION 1: Discuss your understanding of the use of Alligator indicator and show how it is calculated

A trading indicator known as Alligator indicatorwas introduced by Late Bill M Williams (died in 2019). A professional American pioneer trader that also introduced some useful indicators for trading - Awesome Oscillator, Gator Oscillator etc in one of his publication written in 1995 titled Trading Chaos after discovering in a research that trading market is chaos indeed. In his publication, late Bill M. Williams compared the nature of alligator indicator with a real life alligator, an animal that monitors it prey, catch and eat (trend) it, then take a sleep (rest) at a secret point.

Williams alligator indicator is used to examine a market, spot it current state in order to determine the next proper entry direction I.e. bullish, choppy or bearish. Williams alligator have three different color lines which are name after the major parts of an alligator.

• Blue line: This line represent an alligator jaw. It have 13 period and 8 shift.

• Red line: This line represent alligator teeth. The Red line have 8 period and 5 shift.

• Green line: This line represent an alligator lip. It have 5 period and 3 bar shift.

Tabulation of the above explanation

Color	part	Strength	Period	Shift
Green line	Lip	Weak	5	3
Red line	Teeth	medium	8	5
Blue line	Jaw	High	13	8

Basic facts about Williams alligator

• Williams alligator default setting is basically used for minute, Hour and Day trading (M,HR,D). Adjustment of shift and period is necessary when trading on long timeframe.

• William alligator indicator operation is similar to an alligator - Sleep, hunt and eat then take a rest.

• Alligator can be used for trading any asset i.e. stock, currencies or crypto.

• Williams alligator has three basic lines.

• Williams alligator is available in any trading website or software, e.g. TradingView and Metatrader5 etc.

Furthermore, understanding the three lines helps a trader to figure out the 15% to 30% period of profitable trend, enter the market and exit the 70% that is not trending which he is liable to encounter lost. The eating strength is directly proportional to sleep phase. This means that trend will be strong in any direction (uptrend or downtrend) if the market was choppy for a long time.

How Williams alligator indicator is calculated

Despite that it have a default setting, the Williams alligator can be calculated using the following formula;
MP = (H + L)/2
BL = SMMA(MP,P,S)
RL = SMMA(MP,P,S)
GL = SMMA(MP,P,S)

Whereby;
MP is Median Price
H is highest price
L is Lowest price
BL is Blue line (Alligator jaw)
RL is Red line (Alligator teeth)
GL is Green line (Alligator lip)
SMMA is Smooth Moving Average
P is the period
S is the shift

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?

I’m using MetaTrader5 (MT5) app for this process.

• Open the MT5 and Click the indicator option (f) on the right side bar.

• Click on f₍₊₎ to see all the indicators.

• MT5 does not have a search box, so scroll down a bit, and you will see BILL WILLIAMS category. Select Alligator in the category.

• The configuration option will display. Click Done.

• Alligator indicator is successfully added to the chat.

Configuration of alligator indicator

In MetaTrade application, alligator configuration interface is always seen at the last process of adding it to a chat. It is divided into three units - parameters, styles and level.

• In the parameters, the period and shift (jaw, teeth and lip) can be adjust to either an increase or decrease number.

• The default Method is smoothed, but a trader can change it to simple, exponential or linear weight.
  (Method drop box)

• The style categories give a trader an option for changing colours and pixel.

• The level option still displays pixel as well.

• A trader can still return to default setting by clicking on Set to default at the bottom.

Is it advisable to change it default settings?

According to reports from professional traders, alligator indicator default setting is the best. The default period and shift number are Fibonacci numbers. It gives a trader an ease of studying resistance, support and trend. Any change of the number result in increase/decrease of signals. Changing the line colors does not have any effect on the indicator.

A trader can opt to change in order to meet up his trade demand, but the default setting still remains the ideal setting.

QUESTION 3 How do we interpret this indicator based on it 3 phases: the period of rest(sleep), awakening and the eating phase (screenshot)

Rest (sleeping) phase:

This phase is the range state. In the rest phase, the market is usually choppy. A trader tend to find it difficult to know the next direction of trend i.e if it will be bullish or bearish trend. The three lines (jaw, lip and teeth) continuously weave themselves by crossing each other.

The secret of this phase is that the longer the resting period, the stronger it awaking toward any direction - uptrend (bullish) or downtrend (bearish).
A long duration trader tends to face many loss during this period. Except a trader is a smart scalpers, It is not advisable to open a trade during rest period.

Awakening period

In a simple terms, I called this a get-ready signal. During this, traders have started taking over a certain direction. The three lines (jaw, lip and teeth) begin to unweave itself, creating an open on each other and pointing to a certain direction - bullish or bearish thereby signaling a trader to prepare for a trade.

This screenshot shows a bearish (downtrend) awakening.

Eating phase

This is the strong bullish or bearish trend. During this trend, the lip line (green) dominates by remaining at the top and if it retreat to cross another line, a reverse order is triggered. The eating is the profitable trading phase which is usually 15% to 20% profits as explained by Bill Williams
This screenshot shows a eating phase in a strong bearish trend. Strength of Eating phase is directly proportional to the resting phase.

QUESTION 4 Base on the layout of your three moving average that makes up the alligator indicator, how can you predict whether the trend will be bullish or bearish (screenshot)

In question three i elaborated how the alligator indicator react during it awaking phase. Aforesaid, the three line will start to unweave themselves towards the direction of it trend - bearish or bullish.
During it moving average, if the lips (green line) dominate the teeth (red line) and jaw (blue line) by remaining at the top, the market will make a bullish trend. The bearish trend take a reverse of the bullish method. In this trend, the lip (green line) falls below the two other line. The lip is the smartest line that reacts first to any trend. The jaw and teeth follows it moving average.

The above screenshot explains the process of the alligator indicator moving average signal towards bullish (uptrend) and bearish (downtrend) market. In the blue circle point, the lip (green line) takes a leading moving average signal in bullish (uptrend) direction, then the trend continues in the direction. In the bearish the lip line leads in the moving average falling below the jaw and teeth line pointing to downward.

QUESTION 5 Explain how the alligator indicator is also used to understand buy/sell signals, analyzing their different movements (screenshot required)

Understanding the awaking phase of the indicator helps a trader to spot the Buy and sell signal that will occur during eating phase.

• Buy Signal: When a trend awakes towards a buy signal, the alligator indicator lines (jaw, teeth and lip) start to take an upward movement. During the process, the teeth (red line) remains the middle while the lip (green line) remains at the top and the jaw (blue line) is at the bottom.

• Sell signal: The indicator takes a downtrend movement. During this process, the jaw (blue line) is at the top, the lip (green line) is at bottom and the teeth (red line) still remains at the middle.

In order to be sure of the signal, a trader have to wait until the lines completely separate themselves. Both bullish and bearish trend signal takes place at awaking phase of the indicator.

6. Do you see the effectiveness of using the alligator indicator in scalping trading style? Explain this based on a clear example (screenshot).

Scalping means a trading technique of entering and executing a trade within a brief duration thereby resulting in many trade within a day. This trading technique can gives a trader a higher chance of profitable trading because every reverse trend are carefully monitored.

The GBP / USD chart below occurred on 3rd Dec. The market trended in both bullish and bearish direction for minutes then take an immediate reversal. In scalping, trend change direction within a short time. Williams alligator guides scalpers a lot but it is not advisable to leave the computer when running scalp trade because reverse trend always occurs within few minutes.

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.

Just like any other indicator, alligator indicator signal is not 100% accurate. A trader have to apply another indicator in order to figure out the false signal. An indicator called Average directional index (ADX) indicator is the best indicator to add. This indicator helps to determine a trend strength. ADX display a trend strength through an upward and downward movement positive directional indicator and negative directional index which are denoted as +D1 and -D1. If the strength is above 25, it is a strong trend and if it’s below 25, it is a weak trend.

Question 8: List the advantages and disadvantages of the alligator indicator

Pros of alligator indicator

• A trader can spot bullish and bearish signal easily

• Alligator indicator is very suitable for beginners

• Alligator indicator have a default setting

• Percentage of accuracy is higher than false signal.

• Alligator indicator can be use on any market

Cons of alligator indicator

• A trader have to adjust period and shift for each timeframe

• Tend to give inaccurate signal when default setting I altered

• Alligator indicator signal is a bit late when compared with actual movement

Conclusion

Alligator indicator is very useful for profitable trading. Bullish and bearish signal are easily identified using the three lines (green, red and blue) which act just like an alligator. However, advisable to backup the indicator with another indicator e.g ADX indicator in order to enhance efficiency.

Each timeframe have a suitable period and shift code which a trader must use. Using wrong period or shift code results in false signal. A trader can decide to change lines color to his choice.

This lecture helps us to figure out basic information about alligator indicator ranging from historical information to it pros and cons. I appreciate the efforts of prof. @kouba01