Crypto Academy /S5W3-Homework Post for kouba01
Hey guys,
I welcome you'll to the 2nd week of the SteemitCryptoAcademy course by Professor @kouba01. In this course, I will run a comprehensive review of Crypto Trading With Alligator Indicator.
All images used in this post unless otherwise stated are not mine and were extracted from [MT5] and Tradingview for the purpose of this assignment.
Question One
Discuss your understanding of the use of the Alligator indicator and show how it is calculated?
The alligator indicator was developed by one of the market psychology heavyweights known as Bill Williams. The Alligator indicator is one of the tools used by traders around the world on the foreign exchange market. It consists of 3 moving averages that when used simultaneously give you an overall direction of the market.
Understand that the indicator works in a way that financial markets trend in certain percentages which are 15% then 30% then in a ranging market, it can reach up to 70%. The indicator makes use of moving averages which are set at 5, 8, and 13 periods. These are all Fibonacci numbers, the prior averages are calculated with simple moving averages {SMA} and adding other smoothed averages that douses the speed of the indicator
Furthermore, this indicator was designed with the goal of being able to confirm existing trends, allowing counter-movements to be identified (breakouts) and also filter out false trends.
It is not wrong to say that ‘The Alligator gives the trader an edge over the market's movement.’ The operational mode of the indicator is similar to that of the Bollinger Bands which is also another trading indicator. The Alligator can also be used alongside price action as an extra confirmation. Its adaptability and variety of parameters make it a highly dynamic and dependable tool in trading assets.
Ranging Trend
The ranging trend is one in which there is no specific trend in the market, the price movement is choppy and the lines of the indicator are quite close together. It is wise that you do not engage in any trading activity at this time as no trend is obvious thus, you can’t ride the trend.
Genesis of Trends
This occurs when the green line crosses the RED and blue lines as they are the slower lines indicating the genesis of a trend. These early periods can be after some periods of dormancy in the market or after a general period of a trend reversal.
Ascertaining the Direction of the Trend
Furthermore, we can identify the beginning periods of a trend by observing the lines of the indicator. As shown above, in cases of uptrends we observe that the green indicator line crosses up above the red and blue indicator line.
Like other indicators, this indicator can be calculated...
So, for us to get the alligator indicator formula, the first thing we must do is to first ascertain the median price of each candlestick, which can be calculated as the (high price + the low price) / 2.
Furthermore; we can solve for each part of the alligator
| Aligator Part | Solution |
|---|---|
| The Jaw of the Alligator | The Median Price of the 13-period, moved forward by eight bars |
| The teeth of the alligator | The median price of the 9-period, moved forward by five bars |
| The lips of the alligator | The median price of 5-period, moved forward by three bars |
| The alligator jaw | Smoothed moving average (13,8) |
| The alligator teeth | Smoothed average (8,5) |
| The alligator lips | Smoothed average (5,3 ) |
On the U.S Dollar / Canadian chart set on a daily timeframe as shown in the screenshot above
The high value on 16th November 1.25682
The low value was 1.24926
1.25682 + 1.24926 / 2 = 1.88145
1.88145 was the median for the date calculated above
Understand that the indicator works on moving periods meaning that it is prone to giving false signals because of the former periods although the occurrences in the current and future prices help balance everything.
Question Two
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 will be describing how to add the alligator indicator to trading view charts
Step One
The first step involved in adding the indicator is to visit the trading view site www.tradingview.com, after the site opens, myriads of icons and images will be displayed on the screen. Locate charts on the top of the screen and click on it
Step Two
After clicking on the chart icon, the live charts of the assets will be displayed on the screen, alongside their prices. Locate the top of the screen and click on the indicator icon.
Step Three
After clicking on the indicator icon, it will bring up a search bar where you will type in the name of the indicator ALLIGATOR. Before you type the full name of the indicator, it will pop up and all you will need to do is just select the indicator and it will be added to the chart as shown below
You could make adjustments to the characteristics of the indicator through the settings or properties icons
Step One
You can make adjustments to the settings of the indicator by clicking on the gearings icon beside the indicator name to enable you to access the settings. Here, you can make adjustments to the number of periods, primarily. The length of the Jaw, Lips, and teeth can all be adjusted as pleased by the trader. The default periods are; the jaw has 13 periods, the teeth have 8 periods and the lips have 5 periods.
An adjustment is a mathematical tool that is used to determine which periods of the last have the greatest influence on the final mean calculation.
Step Two
Other properties such as the style of the indicator could be adjusted as well. This comprises the color of each of the separate indicator lines which is the JAW, TEETH, AND LIPS. The last one known as visibility only shows the seconds frame, minutes, seconds, and much more.
Customizing the indicator settings
It is wise to avoid customizing the indicator. The reason for this has nothing to do with the original Inventor "Bill Williams". The Alligator works based on Fibonacci numbers, it is placed at levels 5,8, and 13 for a reason. The correction factors 3,5 and 8 were chosen because they are all Fibonacci numbers. Experienced traders know that Fibonacci levels come in handy in various situations, when analyzing a trend, sketching support and resistance, and spotting pullbacks. However, you can personally tweak it for your own personal use.
Meanwhile, we can choose to adjust the periods from the default settings.
As shown in the screenshot above, I changed the figure for the Jaw of the alligator to 21, for the 13 and for the lips 8 simultaneously.
Question Three
How do we interpret this indicator from its 3 phases; the period of rest, awakening, and the meal phase?
Bill Williams referred to these moving averages lines as 'balancing lines'. This is a comparison to which an alligator behavior might be drawn, Indeed, he would like to draw a parallel between the ruthlessness of the stock markets and the brutality of the stock markets, which he believes moves through stages, such as transitioning from a state of rest to a period of hunting. Interpreting this indicator is quite easy to understand; the required knowledge is the movement of the alligator.
The First Phase I Would Love To Discuss Is the Rest Phase
Just as any alligator would do, during this phase, the market is usually quiet without any specific trend whatsoever. The market is usually in a kind of ranging market. In this phase, the market is already consolidated as the lines of the indicator are already very close together. As the indicator lines cross the U.S dollar/Canadian dollar price chart, we can not identify the trend direction because until when the alligator wakes up and begins to trend in a certain direction, trading isn’t advisable. Usually, after these consolidated states, trends become very strong.
The second phase is the awakening stage
This stage of market indicates the beginning of a new trend. The alligator had just open up and is about to take off in any direction. It is very paramount that as a trader, you master how to ride the trends to your benefit. This phase is very vital as it is a defining moment for you. Furthermore, it is characterized by the separation of the three indicator lines. The phase happens after a period of rest and accumulation such that the next thing that happens is that the traders enter the market with high intensity and the trend swings in one direction either bullish or bearish as shown in the screenshot below-
The last phase is the eating or meal stage
The strength and direction of trends at this stage are properly defined, still using the U.S Dollar/Canadian dollar currency pair. Just like an alligator would channel its energy in the direction where it finds food, the indicator works similarly. The lines of the indicator all cross each other in a defined manner with the green line crossing the red and blue in the case of an uptrend, and doing the opposite in the case of a downtrend. The lip of the alligator which is represented by the green line is usually above the other indicator lines in the case of an uptrend as I stated earlier, any change in the motion of the lips usually tells us something new about the market.
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?
The reciprocal interaction of these three moving averages provides a general and easy-to-remember understanding of their movement and behavior. The alligator falls asleep and the trend weakens if the three moving averages begin to overlap and the spread between them narrows. The alligator awakens and the trend begins as the three moving averages begin to separate and the gap between them grows.
When working with these moving averages, it's also critical to notice the commencement of an uptrend (the blue line arrives at the lowest position of the three averages, the green line is at the top). The beginning of a downtrend behaves similarly, but in the opposite direction (blue line at the top, green line at the bottom).
Identifying Uptrends (Buy or bullish trend)
You can identify trends using the layout of the three moving averages which are the green, blue and red line. These moving averages move in response to the beginning and continuation of trends such as uptrends or bullish trends. It is vital to await the expansion of the lines before buying as it helps confirm the trend. It is characterized by the lips of the alligator which is the green line being across all the other lines with the red being in the middle and the blue being beneath as shown in the screenshot below
The screenshot above shows the beginning phase of an uptrend of the U.S Dollar/Canadian dollar set at the 2-hour timeframe. At the beginning of the new uptrend, we can see the green moving average line crossing the other moving averages. Furthermore, as this green indicator line crossed the red and blue MA line with the RED in the middle, the lines get broader showing a meal phase; the continuation of the trend.
It is important to note that this pronounced trend usually happens after a period of rest as the traders consolidate and enter the market in full force again as shown in the screenshot above.
Identifying Downtrends
We can also know whether the trend will be bearish. This is also done through understanding the movement of the MA lines. In predicting downtrends, we must observe the market and ascertain the psychology of the market. Generally, trends are more pronounced whenever the market is just leaving a period of rest or dormancy. This happens after the market doesn’t have a defined trend thus, the alligator indicator lines come very close to each other.
Furthermore, we can also predict downtrends by observing the green MA line of the indicator. The green line crosses the blue line first and the red as it goes beneath them both indicating a downtrend. The green line of the indicator which is the lips is must cross and beneath all other lines in a sell or bearish trend.
Question Five
Explain how the alligator indicator is used to understand sell/buy signals, by analyzing its different movements?
As stated earlier, the alligator indicator works mostly based on its mouth, once the mouth of the alligator is about to open, the moving averages start getting wider apart, and giving a sell or buy will depend mostly on the color of the moving average above and below out of the three moving averages.
Sell Signal
The sell signal is best activated when the market plunges into a downtrend. This indicator is quite easy to understand as I have explained earlier, the indicator works with three moving averages line the green, blue and red. During the period of selling in a trade, the green line which was gliding above the red and blue line initially will cross them and come beneath. So the best way to analyze a sell signal is by watching the action of the green line. Once the green line crosses the other moving averages and proceeds to stay beneath and even open or widen up, it is a good time to sell.
Buy Signal
For the buy signal, we can also ascertain the possibility of an uptrend by watching the moving averages line. Once the green line of the indicator crosses above the other two indicator lines, it signals the beginning of an uptrend especially after a period of rest. However, even during a normal trend reversal, the crossing of this green line above the other two, with red in the middle, indicates a buying signal.
Note that, using these signals doesn’t guarantee successful trading. It is good to employ the use of proper risk management by using 1:1 or 1:2 risk management. This is to ensure that you do not step out of trends too early or continue to stay in a trade ignoring the signs of obvious trend reversals.
Question Six
Do you see the effectiveness of using the alligator indicator in scalping trading style? Explain this based on a clear example?
To begin with, we need to have an understanding of what scalping is. Scalping is a trading technique used by traders to take profits from trading in very short periods of time. This could be done by carrying out buy or sell orders quickly to make profits. The main feature of scalping as a trading mechanism is to hold from a few seconds to minutes. In fact, you could take profits by opening several positions within a day. So what traders basically do is to ascertain the direction of a trend, plunge into the trade for a few seconds, take profit, and exit that trade. With few movements in price in seconds, you could close trades with large profits. One could scalp manually by watching how the prices and indicator moves and the whole process could be automated as well. Notwithstanding, the alligator indicator proves to be a great indicator that could assist traders scalp. Understand that the risk is quite as high as the potential profit, just as little movements in the right directions would impact your trade positively, if the market goes against you, you stand the chance to lose a lot of money. The beauty of using the alligator indicator in scalping is that the movements of the MA lines help you understand and predict trends. Immediately you leave a dormant market and for instance the green MA line crosses upwards, it means that an uptrend is certain as the alligator is its awoken phase and is heading towards its meal.
In the screenshot above, we can identify the beginning parts and continuation of the uptrend using the alligator indicator
The screenshot above shows the chart set at 1 minute i.e each candlestick is 1 minute long in duration. So after the green MA line crosses the red and blue and begins to widen up, you can begin to scalp at either 1 minute or 3 minutes bearing in mind the gap between the MA lines is 1 minute long. So you can scalp and once two more candles appear, close the trade. Rinse and repeat in that fashion.
Question Seven
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
The Gator indicator is also useful for evaluating position input signals. It's an alligator with an oscillator attached to it that draws columns around the zero value. The distance between jaws and teeth (blue and red lines) is shown by positive columns in the positive field, whereas the distance between teeth and lips is indicated by negative columns below zero (red and green lines). The rate of increase/decline of these averages is used to determine the color of the line. The bar is green if the average is increasing at a faster rate and red if the average is increasing at a slower rate. This indicator is very effective when used in conjunction with another technical analysis tool, such as the CCI, which is used to determine the trend, the strength of the trend, and whether a certain investment instrument is oversold or overbought.
We could use another indicator which is the Heikin-Ashi indicator to help filter the noise in the market. This indicator is particularly special in doing this, as it helps filter the noise in the market and provi9de you a clearer image and depiction of the market generally. Scalping now becomes very easy to do using the combination of these indicators.
Also using the combination of the Bollinger band MACD with the traditional candlesticks, we can ascertain points that we are to buy and scalp in few minutes before closing the position. There are several other indicators that could be used alongside the alligator to help in scalping.
Question Eight
List the advantages and disadvantages of the Alligator indicator?
Pros
The alligator indicator proves to be a good tool in helping traders understand trends and how to plug into trades early enough to maximize profits.
Although indicators are not 100% accurate, this indicator has the ability to give out consistent and accurate signals which can actually give you a hedge when trading.
The indicator also has the ability to show the momentum and when the momentum of an asset begins and ends.
The indicator produces fewer false signals because of the presence of the actions of the 3 moving averages. Contrarily, other indicators use 1 line or 2 lines to indicate price actions.
Cons
The indicator has limitations especially when the market is in a choppy range trend because during a range market, we don’t necessarily see a trend.
The lines are actually based on timing or they are time-based such that the signals generated become obvious a little late.
The indicator operates after the price moves to mean that the indicator might give out late or false signals.
If a market is very volatile, it is not very good as it will also produce false signals.
Conclusion
The alligator indicator just as the name suggests behaves like a biological animal. The alligator before and after eating returns to a period of rest where little or activity takes place this results in a ranging market. Ensure you do not trade during this period as no specific trend is defined, and it is better to ride the trend. This indicator combined with other indicators is a good tool for technical analysis and although it has some shortcomings just like any other indicator, we can say it is quite an efficient tool that can help traders during trading operations.
Special thanks to Professor @kouba01