Crypto Academy Season 5 [ Advanced course ] week 3: Crypto Trading With Alligator Indicator
To make a good Crypto Trading it is very important to use technical analysis tools. There are many Indicators and Oscillators for various uses, such as Alligator Indicator.
The Alligator Indicator is a widely used tool, due to its easy understanding. This Indicator is based on a strong visual impact which makes it very simple, even for those who do not have great technical analysis skills.
This indicator was invented by Bill Williams, a famous trader, when he observed the behavior of this animal and saw the implications for market movements: sleep alters price-hunting habits, and then sleeps again. The longer the crocodile sleeps, the more hungry it will be, and the more powerful it will hunt when it wakes up, which means the price will fluctuate more. It's fun, isn't it?
In this article, let's learn with what the Alligator indicator is and how to trade our cryptocurrencies with it?
The Alligator indicator is an indicator based on 3 moving averages calculated over 3 different periods and projected into the future, it was created with the aim of being able to define and confirm the current trends, it also makes it possible to identify counter movements. -trend and filter the good signals from the bad signals.
This allows the trader to stay in tune with the trend. A certain similarity can also be established between the functioning of the Alligator indicator and the Bollinger bands.
The indicator consists of three lagged moving averages, green, red and blue.
The green line follows the curve closest to the price action, the red line is the middle average and the blue line is the furthest from the price action (See example in the chart below).
The indicator is made up of the following 3 moving averages:
- Blue (alligator jaw) - 13 period slow moving average, adjusted for the last 8 periods
- Red (alligator teeth) - Moving average over 8 periods, with adjustment over the last 5 periods
- Green (alligator lips) - Fast moving average over 5 periods, with adjustment over the last 3
Take my word for it:
if you want to become a successful trader, you have to learn the numbers behind the tools you use.
Of course, it's good to know roughly what an indicator is and how to read its signals. This is good for beginners who use the demo account in their spare time, but not for those who are serious.
If you plan to dedicate yourself to technical analysis at a high level, make sure you don't neglect math. Only then will you be able to understand how to combine technical analysis indicators to create strategies that really work.
The Alligator indicator is calculated as follows:
Median price = (High + Low) / 2
Alligator jaw = MMA (Median price, 13, 8)
Alligator Teeth = MMA (Median price, 8, 5)
Alligator Lips = MMA (Median price, 5, 3)
The adjustment is a mathematical tool that is used to make the most influential periods of the last on the final calculation of the mean. In very simple terms, it is used to make the newer candles weigh more than the old ones.
Very often the trading signals generated with the use of a single moving average are delayed or not precise enough. However, when using an indicator such as the alligator, a triple confirmation of three different moving averages is required for the position to be opened.
The fact that this indicator has to check its signals three times makes it less prolific at giving indications, but these are much more accurate than one would get with a single average.
Very often we suggest trying to change the indicator settings, in order to observe how their display changes on the chart.
Speaking of alligators, however, we think it's best to avoid customizing the indicator. The reason is very simple and relates to the work of Bill Williams in setting up the instrument.
The Alligator is placed at levels 5, 8 and 13 because these are all three Fibonacci numbers. The 3, 5 and 8 (the adjustment factors) are also chosen because they are Fibonacci numbers.
Anyone who has traded for some time knows that Fibonacci levels come in handy many times: when studying a trend, when plotting supports and resistances, when choosing market entries, etc.
You can try, a bit for fun, to customize the alligator calculation using the demo account, and if you practice a bit with the custom levels, after a while you will find that their accuracy is fine. lower than what you would get using standard levels.
You can also use other Fibonacci levels to make the indicator react faster or slower to price movements. For example:
8 period blue line with adjustment of 5
5 period red line with 3 period adjustment
3 period green line with adjustment of 2
Blue line of 21 periods with an adjustment of 13
13 period red line with an adjustment of 8
8 period green line with adjustment of 5
Those who love trading love to experiment, especially when they are learning. Try using the alligator with these levels and you will definitely see some noticeable differences.
The inventor of these moving averages describes them as "balance lines", the similarity of which is distinguished by the behavior of an alligator.
Indeed, with this image of a ferocious animal, he would like to make an analogy with the ruthlessness of the stock markets, the development of which he considers goes through different stages, for example passing from a state of rest to a period of hunting.
- The rest phase of the Alligator indicator
As shown in the chart below, He considers the market to be at rest when the jaw, teeth and lips are brought together, according to him the alligator is asleep and there is no bullish or bearish trend on the stock market.
According to its designer, it is advisable not to position yourself on the market during this period of rest, because the alligator being unpredictable, the longer it sleeps, the more hungry it will be when it wakes up, and the greater the risk of a strong variation. possible.
- The awakening phase of the Alligator indicator
When the Alligator wakes up, it opens its mouth and prepares to devour the market, until it has eaten enough, finally the alligator goes back to sleep, so it's time to take some profit.
The alligator will chase the prize further and make a decent profit.
After eating enough, the alligator goes back to sleep (moving averages converge), so it's time to take some profit.
On a purely technical level, this indicates that the trading phase occurs when the moving averages cross (awakening of the alligator) to deviate (Divergence of the curves), this corresponds to a buy signal (See graph below) or sell depending on the cross order.
The closing of the alligator's position or sleep occurs when the moving averages cross or converge (convergence of the curves).
Now let's see how it is possible to understand what will be the direction of the trend when the crocodile "wakes up", as well as to understand what will be its strength or intensity.
The general and easy-to-remember interpretation of the movement and behavior of these three moving averages is based on their mutual interaction. If the three moving averages start to overlap and the spread between them narrows, the alligator falls asleep and the trend weakens. As the three moving averages start to diverge and the gap between them widens, the alligator wakes up and the trend begins.
When interacting with these moving averages, it is also important to identify the emerging trend, i.e. to recognize the start of the uptrend (the blue line arrives at the lowest position of the three averages , the green line is at the top). The start of the downtrend behaves analogously, but vice versa (blue line at the top, green line at the bottom), see the image of the trend reversal on the STEEM / BTC pair.
Now you know all about what the alligator is and how it is calculated. We can finally move on to the “juiciest” part of our course: let's find out together how to use it to generate trading signals.
The signals generated by this indicator depend on the position of the three lines:
- When the green line rises above all the others, the red line is in the middle and the blue one is lower than all, a buy signal is generated;
- When the blue line passes all the others, followed by the red in the middle and the green at the bottom, a sell signal is generated.
The best time to buy is when the green line has recently crossed the others, but waiting at least 3/4 periods to ensure the current trend strengthens.
The best time to close, however, is more debatable:
Someone, a purist of this indicator, prefers to wait for the moment when the lines touch again and the blue one overtakes the others;
Someone else, more cautious, prefers to close when the lines start to close together.
Both strategies can work. The first risks ending up in closing when the trend has already ended and the reverse trend has already started; the second risks not letting you surf the whole current trend.
In any case, it is always a good idea to practice before starting to use an indicator with the live count. For this, we recommend that you start getting carried away with the alligator by using the demo account to try and trade risk free.
Scalping is a choice shared by a growing number of traders all over the world. In fact, it is an effective strategy to take advantage of the main characteristics of certain markets, just like crypto.
In short, it is about opening / closing positions in a very short time, sometimes even a few minutes. In doing so, the scalper makes sure to take advantage of the high daily volatility that particularly characterizes the main cryptocurrency pairs, as they are subject to continuous price variations.
The example presented here, relating to the BTC / USD pair, with a chart set at 1 minute:
The image shows up to 13 trades that can be performed in a single hour of trading. The Alligator indicator, in this case, shows a sideways market phase in which the value of the cross in question is constantly fluctuating. In short, it turned out to be an ace in the hole to enter the market quickly but profitably.
The Gator indicator is also an aid in evaluating the signals of the position inputs. It is an alligator modified in the form of an oscillator which draws columns around the zero value. Columns in the positive field indicate the distance between jaws and teeth (blue and red lines), negative columns below zero indicate the distance between teeth and lips (red and green lines). The color of the line itself is calculated from the rate of increase / decrease of these averages. If the average is increasing at an accelerating rate, the bar is green, if it is increasing at a decreasing rate, the bar is red.
This indicator can be particularly useful in combination with another technical analysis tool, such as the CCI, which is used to identify the trend, the strength of the trend and the oversold or overbought of a given investment instrument. At the same time, Alligator will be particularly useful for patient traders who invest in the medium term for several weeks.
Nevertheless, it is good to be careful when entering position - although the indicator is set to move forward, it can indicate the amount of false signals that need to be filtered out using other TA tools.
The advantages of the Alligator indicator
- The Alligator indicator produces fewer false signals than a system based on one or two arithmetic moving averages.
The disadvantages of the Alligator indicator
Moving averages are lagging indicators, by nature they tend to give false buy or sell signals.
The more you choose a moving average calculated over a small number of periods, the more signals you will have and therefore false signals because the moving average will be stuck to the price.
In conclusion, the Alligator indicator is an excellent tool for making particularly accurate trading predictions. Its flexibility and the multiplicity of factors that allow it to be analyzed make it an extremely dynamic and reliable technical tool.
In general, it is always advisable to use it with other indicators, but the Alligator can also be used on its own thanks to its completeness.
1. Discuss your understanding of the use of the Alligator indicator and show how it is calculated?
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)
3. How do we interpret this indicator from its 3 phases: the period of rest(or sleep), awakening, and the meal phase?(Screenshot required)
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)
5. Explain how the Alligator indicator is also used to understand sell / buy signals, by analyzing its different movements.(screenshot required)
6. Do you see the effectiveness of using the Alligator indicator in scalping trading style? Explain this based on a clear example.(Screenshot required)
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.
8. List the advantages and disadvantages of the Alligator indicator:
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