The alligator indicator was first introduced by Bill Williams in the 1990s with the idea that markets trend a small portion of the time while remaining in a sideways range for most of the time.
The indicator was developed to give simple buy and sell signals by using three simple moving averages set at five, eight and thirteen time periods (Fibonacci numbers) with each moving average representing a different part of the alligator:
Jaw (blue) – thirteen SMA
Teeth (red) – eight SMA
Lips (green) – five SMA
The different parts of the gator open and close in accordance to price action. When the Lips (green line) cross over the other two moving averages it indicates a buy signal while when it crosses below the other two moving averages it indicates a sell signal.
If the moving averages are crossed and moving sideways it means the alligator is sleeping and usually the longer they trade sideways the hungrier the alligator will be when it wakes up.
The indicator works very well for trending stocks and is designed to keep you in the trade as long as possible. A lot of traders will use this indicator in combination with an oscillator indicator like stochastic’s or MACD to help confirm price action.
Warrior Trading Pro Tip
If you are using the alligator indicator make sure to use it in combination with an oscillator. This helps confirm price action and if you see any divergence between the two indicators then you know that the price action is confused as their is a struggle between buyers and sellers.
Another tip is to watch volume as the stock pulls back from the trend. You’ll want to see lighter volume on pullbacks with heavier volume on candles moving in favor with the trend.