The trend line is not as frequent a phenomenon in the Forex market as its participants would like. And during lateral movement it is not safe to make deals.
Any financial asset 70-80% of the trading day moves in side ranges of different width and only 20-30% of the time there are strong and directed movements where you can take good profit. But the main problem in determining the moment of start of the trend, because any technical indicator has a lag, completely rid of which it is impossible. One solution to this problem will be the Alligator indicator developed by Bill Williams, which produces stable profits even in today 's high-frequency (HFT) trading environment.
Alligator is the main element of the comprehensive trade strategy of Profitunity and its main task is to determine the moments of the flute, to give signals of the beginning and end of the current trend. From a technical point of view, we have a set of Moving Averages shifted forward from the current price for a certain number of bars. Thus, it is possible to predict future movement in the medium and long term using the indicator, but with speculative actions and increased volatility, the quality of signals drops sharply.
Calculation and Setup Methodology
The average price of past periods is determined first by formula:
PriceMedian = (PriceHigh PriceLow)/2.
The second step will be to calculate the total smoothed moving averages:
SMMA(i) = (SUM(1) – SMMA(i-1) PriceMedian(i))/N,
SMMA (i) - smoothed value of the current bar excluding the price of the first (farthest) period;
SUM (1) - sum of average prices for N periods (starting from the previous bar);
SMMA (i-1) is the smoothed value of the previous bar;
PriceMedian (i) is the average price of the current bar.
As a result, the indicator plots three dynamic smoothed curves:
SMMA (MedianPrice; 13; 8), "Alligator jaw" (13) - AlligatorsJaw periods, 8th bar shift forward, by default blue;
SMMA (MedianPrice; 8; 5) or "teeth" (AlligatorsTeeth) - red, 8 periods and 5 bar displacement;
SMMA (MedianPrice; 5; 3), "lips" (AlligatorsLips) - the third 5-period medium with a displacement of 3 bars. Basic color green.
All moving Alligator averages are balance lines with a "fair" price across multiple timeframes excluding external (mostly fundamental) factors driving the market.
The tool is part of the basic set of all popular trading platforms such as MetaTrader. Williams recommends not changing baseline parameters for most assets, but the current Forex is much more volatile than when Alligator was created. The indicator does require tuning and careful testing on history.
The Moving Average type and periods and the number of bars to be shifted are similar to the Fibonacci series and a minimum lag is achieved by doing so. It is this feature that makes the indicator and its signals unambiguous not to allow multiple signal interpretation.
The Alligator indicator is a classic strategy with breakdown and turn signals from each of the average. Three successive states (phases) are identified:
The sliding averages move horizontally, are heavily intertwined and represent a narrow price range around the red MA with no trading signals. The longer the flet lasts, the bigger the "hungry" indicator, the stronger and longer the new market movement.
2. "Awakening (pharynx)"
The first response to the increase in market activity is a "fast" average AlligatorsLips (green) showing the most likely direction of the new trend. It is believed that it is possible to open a deal at the moment of its crossing at the price, but it is better to wait and make sure that the lines are correctly positioned relative to each other and increase the distance between them (Alligator goes "hunting").
Alligator at different market phases
Alligator at different market phases.
3. "Disclosure of a mouth"
Continue to support the current movement with new participants and volumes, confirming the reaction of the red line of the AlligatorsTeeth, and the "slow" blue AlligatorsJaw completes the formation of the figure.
4. "Falling asleep"
When the trend ends, the lines begin to cross again and go horizontally (the indicator is "saturated"). It is recommended that you close the current items regardless of the current profit/loss level.
During the whole trend of Alligator indicator lines should be arranged in strict order: green - red - blue. It is necessary to open after crossing the price of all three MA, the entrance on the bounce from the AlligatorsTeeth only after additional confirmation. In the final stage, there is an inverse intersection, but again in the same order.
Proceed directly to Alligator signals. The indicator gives the following entry points:
purchase. The price breaks through all moving averages and closes above them. Lines are directed upwards and strictly in AlligatorsLips order (lower)
Basic Terms and Conditions for Purchase
Basic Purchase Terms (BUY).
sale. Opposite conditions: price punches the Alligator indicator from top to bottom, the last 2-3 candles are closed below the point of intersection. The middle ones are pointing down in order AlligatorsJaw
Basic Terms and Conditions for Sale
Basic Terms and Conditions for Sale (SELL).
The volatility range will be the distance between the green and blue lines, the slope angle can be used to estimate the strength of the trend.
Alligator, indicator for complex strategies
The main rule: regardless of the type of strategies and additional tools Stop Loss is mandatory!
Depending on the trading goals and the most comfortable trading style for the trader, the key to entering the market and installing Take Profit/Stop Loss orders will be different average:
green. With aggressive scalping, allowing you to pick up the maximum profits;
red. Here, the average profite level may be lower than in the previous embodiment, but the overall risk level (moderate trade) also decreases;
blue. Medium- and long-term deals, which can be accompanied by quite deep slips, but at the same time Alligator gives an opportunity to stay on the trend as long as possible.
Set Stop Loss on LED lines
Set Stop Loss on the LED lines.
The Alligator indicator does not recommend Take Profit size, everything is determined individually, and when installing Stop Loss it is recommended to follow the rules:
Placing behind the line AlligatorsJaw makes the position more resistant to random and speculative price impulses, but increases the risk as the price when approaching the line already moves the transaction to a critical loss level;
Stop Loss in the fast medium AlligatorsLips zone often results in rapid closures on minor corrections and kickbacks after which the trend resumes, but already without us;
A good solution will be to divide the volume of the deal into 3 equal parts: stop for the 1st part is behind the line AlligatorsJaw, the 2nd behind the AlligatorsTeeth, completely close the position when the AlligatorsLips is punched. This approach allows the tool to be used not only to profit from short-term momentum, but also as a timely output signal when it ends.
How to use with standard indicators
The basic principle of trade strategies is that the instruments used should be from different groups and thus confirm each other 's signals. Therefore, consider the following combination in addition to Alligator:
Fractals indicator with default parameters;
Simple (SMA) moving average with period 233;
Stochastic overbought/resale oscillator (11,3,3). Parameters can change during periods of high volatility upwards;
First of all, we do not open deals if the fractal is formed above or below the Alligator indicator - it indicates that the price is completely out of the range of moving averages and the technical rollback is complete. We also stay out of the market when fractals are in the weave zone.
Example of strategy with addition of standard indicators
An example of a strategy with the addition of standard indicators.
General rules of trade:
Set a deferred BuyStop order for purchases and sales SellStop 2-3 points above/below the current price when the price crossed the last fractal level the second time after the rollback;
Next it is possible to move towards a trend, opening additional deals on new fractals; Up only purchases, down only sales;
Application of "long" SMA makes it possible to quickly determine the long-term trend: the price is higher - upward, lower - downward, moves horizontally - flet.
Fractal signals filter out Stohastic: lines down after turning at 70/80 confirm sale, up from 20/30 purchase.
We sum up the result
As a trend determiner, the tool can be included in the strategy with any input methodology. For example, you can open using a quick line, and record profits on the other two slow ones. Or close deals on opposite signals from other indicators such as Awesome, MACD or the Stochastic discussed above;
It is possible to combine Elliott wave theory and Alligator indicator. How to use: if the price has gone abroad AlligatorsJaw a pulse wave is formed, moves inside this zone - correcting;
The main drawback is Williams 'decision to use moving averages, which are the most lagging technical tool, although markets were less mobile at his time, and such a decision is justified. But if the signals are confirmed by oscillators on higher timeframes from H1 and higher, Alligator indicator allows to take confidently at least the 60-70% of any trend.