Crypto Academy / Season 5 / Week 3 / Advanced: Crypto Trading With Alligator Indicator

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Hello Steemians, I hope you all are doing well? This week lecture by prof @kouba01 focused on the technical indicator Alligator indicator. The lesson gave a detailed overview of the indicator, and I will be doing the homework task from the lesson.

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

Alligator Indicator

Alligator Indicator, also known as the Williams Indicator is a technical indicator developed by seasoned trader Bill Williams that uses three smoothed moving averages with different colours to confirm trend and trend strength. The different colours represent the Alligator's lip, jaw, and teeth, with green representing lip, blue representing jaw, and red representing teeth.

The moving averages have different default settings. The settings are given below.

• Green (Lips) - Moving average is set for a period of 5 with an adjustment of three. The Green moving average is the fastest moving average in the Alligator indicator.

• Blue (Jaw) - The moving average is set for a period of 13 with an adjustment of 8. The Blue moving average is the slowest moving average in the Alligator indicator.

• Red (Teeth) - The moving average is set for a period of 8 with an adjustment of 5.

The Alligator indicator works on the principle of the said animal (Alligator). When the three lines converge (when the moving average crosses each other or is intertwined), it signifies the closing of the Alligator's lips, jaw, and teeth from overfeeding or tiredness. In trends, it indicates the end or weakening of a trend.

The longer the Alligator sleeps or closes his mouth, the hungrier it becomes. Therefore, traders do not typically take a position when the Alligator sleeps or the moving average converge because the price action trend may be weak or in a range.

When the three moving averages diverge, this indicates that the Alligator is about to feed, and the wider the distance the three moving averages diverge, the greater the trend strength. The Alligator can decide to feed upward, creating an uptrend, or feed downwards, creating a downtrend.

How To Calculate The Alligator Indicator

The Alligator Indicator can be calculated using the following formulas.

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)

When calculating the Alligator Indicator, the first step is to calculate the median price of each candlestick using the formula below.

Median price = (High + Low) / 2

Next is the calculation of the Alligator jaw moving average. This is done by calculating the median price of 13 periods shifted forward by 8 bars. Using the formula below.

Alligator jaw = MMA (Median price, 13, 8)

Then, is the calculation of the Alligator teeth moving average. This is done by calculating the median price of 8 periods shifted forward by 5 bars. Using the formula below.

Alligator teeth = MMA (Median price, 8, 5)

Finally, is the calculation of the Alligator lips moving average. This is done by calculating the median price of 5 periods shifted forward by 3 bars. Using the formula below.

Alligator lips = MMA (Median price, 5, 3)

The adjustments are mathematical tools used to make the newer candlestick weigh more than, the older ones.

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 ?. (Screenshot required)

Adding Alligator Indicator To The Chart

I will be using the trading analysis site tradingview.com to illustrate how to add the alligator indicator on a chart.

First, I visited the tradingview site using this link and clicked on chart on the homepage.

_{screenshot taken from tradingview}

On the chart, click on indicators at the top of the chart.

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After clicking on the indicator icon, a search bar pops up. Search for the alligator indicator. Click on the Williams indicator (for trading view)

_{screenshot taken from tradingview}

Once the indicator is clicked, it is immediately added to the chart, as shown below.

_{screenshot taken from tradingview}

Configuring The Alligator Indicator

To configure the Alligator Indicator, click on the Alligator indicator settings as shown below.

_{screenshot taken from tradingview}

On the indicator settings, click on Inputs. The default settings for the alligator indicator is shown below.

_{screenshot taken from tradingview}

Then, click on Style. On the style pop-up, the default colour variations are shown with the blue colour for the jawline, the red colour fot the teeth line, and the green colour for the lip line moving averages. As shown below.

_{screenshot taken from tradingview}

Lastly, click on the visibility settings. The default settings are displayed on the pop-up, and then click on Ok

_{screenshot taken from tradingview}

It is not advisable to change the default settings. This is because the inputs of each moving average level are Fibonacci numbers. These numbers (levels) are vital in trade analysis when looking for support and resistance and market entries.

Also, the accuracy of the trade signal given by an Alligator indicator with customized settings is low when compared to the Alligator indicator with the default settings

Question 3: How do we interpret this indicator from its 3 phases: the period of rest(or sleep), awakening, and the meal phase? (Screenshot required)

From earlier stated, the Alligator indicator is developed based on the behaviour of the Alligator. Therefore, when the line converges, it represents the sleeping stage, and when it diverges, it represents the awakening and meal phase. The various phase will be discussed below.

The Rest (or Sleep) Phase

The rest phase of the Alligator is when the three moving averages (lip, jaw, and teeth) cross each other or are intertwined with each other signifying the closing of the mouth of the Alligator (meaning the Alligator is in a resting or sleeping phase primarily due to overfeeding).

_{screenshot taken from tradingview}

The rest or sleep phase of the alligator indicator signifies a weak trend or the end of a current trend. It also represents a range in the market, and traders do well not to take a position in the rest phase; instead, they close open positions if they've made enough profits.

The Awakening Phase

This is the opening of the Alligator's mouth; after a long or a short rest, the Alligator opens his mouth ready to feed upwards (creating a bullish or an uptrend) or feed downwards (starting a bearish or a downtrend). The awakening represents the divergence of the three moving averages.

_{screenshot taken from tradingview}

The formation of the moving averages determines the direction of the trend or the direction the Alligator will feed. The awakening phase is the reinforcement or start of a new trend.

The Meal (Feeding) Phase

The meal phase can be called the trend phase, in my opinion, cause this is the phase when the Alligator feeds either upward or downward, creating a bullish or a bearish trend, respectively.

_{screenshot taken from tradingview}

After the awakening phase, the Alligator hungry decides to feed, and the direction in which he chooses to go is the current market trend. Therefore, the formation of the moving average during the awakening helps traders predict the feeding direction. Also, the length of the rest phase with the distance of the moving averages during the awakening stage helps traders predict the strength of the trend or how hungry the Alligator is.

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 (Screenshot required)

How To Predict Trend Using The Alligator Indicator

The Alligator indicator can be used to predict trend directions. This is s known during the awakening stage of the Alligator. The formation of the moving averages helps in the prediction of the trend direction.

Predicting A Bullish Trend

During the awakening phase of the Alligator indicator, the green moving average moves to the top, indicating a bullish trend or that the Alligator will feed upward. During divergence, the green moving average or the lip moves to the top, and the blue moving average or the jaw moves to the bottom with the red (teeth) in the middle.

_{screenshot taken from tradingview}

Predicting A Bearish Trend

During the awakening phase of the Alligator indicator, the blue moving average moves to the top, indicating a bearish trend or that the Alligator will feed downwards. During divergence, the blue moving average or the jaw moves to the top, and the green moving average or the lip moves to the bottom while the red moving average or the teeth stays in the middle.

_{screenshot taken from tradingview}

Question 5: Explain how the Alligator indicator is also used to understand sell / buy signals, by analyzing its different movements.(screenshot required)

The aim of every trader when using an indicator is to predict trends and identify entry (buy and sell) signals. This is no different for the Alligator indicator as it is used to identify buy and sell signals on an asset with good accuracy.

Buy Signal

When using the Alligator indicator, the buy signal is identified when the green moving average moves to the top of the other moving averages. For example, a buy signal is identified when during the awakening stage, the green moving average or the lip moves to the top during divergence.

_{screenshot taken from tradingview}

A trader should wait for at least three candles to ensure the current trend strength and prevent entering a position on false signals.

Sell Signal

When using the Alligator indicator, the sell signal is identified when the blue moving average moves to the top of the other moving averages. For example, a sell signal is identified when during the awakening phase, the blue moving average or the jaw moves to the top during divergence.

_{screenshot taken from tradingview}

A trader should wait for at least three candles to ensure the current trend strength and prevent entering a position on false signals.

Question 6: Do you see the effectiveness of using the Alligator indicator in scalping trading style? Explain this based on a clear example.(Screenshot required)

Effectiveness Of Using The Alligator Indicator In Scalping Trading Style

Scalping trading is a trading strategy gaining momentum among many traders that involve entering and exiting a trade position over a short period. Scalping trading is the taking of small profits resulting from slight price movement present in a day.

Various indicators help scalpers identify entry and exit points in an asset, and one of the most effective is the Alligator indicator.

_{screenshot taken from tradingview}

On the ADAUSDT chart, an example of 7 scalping trading opportunity represent itself. In addition, the Alligator indicator gave accurate buy and sell signals in a ranging market.

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.

Pairing The Alligator Indicator With Other Indicators

As with most indicators, there is always the risk of false signals due to one reason or the other and need to be paired with other indicators to help reduce false signals and further confirm trade signals. In the case of the Alligator indicator, it is necessary to pair the indicator with other indicators like the momentum indicator CCI because the Alligator indicator timing lags due to its future positioning.

_{screenshot taken from tradingview}

A practical example is given above on the ALICEUSDT chart. The CCI indicator line moved below the oversold level and crossed above it, signifying a buy signal. On the other hand, the Alligator indicator lagged by ten candles before giving out the buy signal, losing out on profit parts.

It is necessary to pair the Alligator indicator with other leading indicators like the RSI, CCI, etc. This is to help spot trade signals on time and filter false signals given by the Alligator indicator, especially during the rest phase.

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

There are advantages and disadvantages to everything, and the Alligator indicator is not exempted from this fact.

Benefits of The Alligator Indicator

• The Alligator indicator is straightforward to understand even for a trading newbie and has basic rules of interpretation.

• The Alligator indicator gives fewer false signals when compared to indicators with 1 or 2 moving averages.

• The Alligator indicator is effective for scalping trading style.

Drawbacks of The Alligator Indicator

• The Alligator indicator is lagging (as with other moving average indicators). This makes it unreliable to react to current price changes.

• The Alligator indicator gives more false signals when the default settings are changed and customized

Conclusion

The Alligator Indicator is an indicator that uses three moving averages to help identify, predict and confirm trends. Also, the Alligator indicator has 3 phases; the rest phase, the awakening phase, and the meal phase.

Each of these phases represents the behavioural nature of the Alligator that the indicator was built on. Trade signals are identified by the formation of the moving averages when they converge and diverge.

Thanks, prof @kouba01, for a fantastic lesson.