[Alligator Indicator]- Crypto Academy /S5W3-Homework Post for @kouba01
Now let's proceed to the assignment proper.
Discuss your understanding of the use of the Alligator indicator and show how it is calculated?
About Alligator Indicator
The Alligator Indicator was created by Bill Williams in 1995, an indicator he created to interpret the action of the market during trends. That is when the market is trending and when it is at rest.
Bill Williams a market phycologist attempted to explain the action of the market using the action of the real life alligator. So he observed that the alligator in real life spend much time resting or sleeping and then when it wakes up from such sleep it is always very aggressive seeking for food. Williams then compared that to the trading ecosystem, were he observed that 70% to 85% of the times that the crypto ecosystem is always at a state of rest i.e ranging(continues sideways movement) and uses 15% to 30% to trend(either upward or downwards movement).
Therefore he concluded that the market behaves like the real life alligator which prompted the creation of the Indicator called the Alligator Indicator. Now the alligator Indicator consist of three smooth moving average lines, with different colors which helps traders to identify trends. Now Williams named the three alligator lines according to the mouth parts of the real life alligator as seen below.
- Jaw line (Blue colouration)
- Teeth line(Red colouration)
- Lip line (Green colouration)
Screenshot showing the alligator Indicator
The Jaw of the Indicator identified by the Blue color with a period of 13 and an adjustment of 8 periods. The teeth with the Red colouration has a period of 8 with an adjustment of 5 periods. And also the Lips shown by Green color has a period of 5 and an adjustment of 3 periods.
The interactions of the alligator lines brings forth the trend interaction, which Williams interpreted as the sleeping and waking stages of the indicator in consonant with the real life alligator.
Calculation of the Alligator Indicator
The formula for this indicator goes thus;
MEDIAN PRICE = (HIGH + LOW) / 2
ALLIGATORS JAW = SMMA (MEDIAN PRICE, 13, 8)
ALLIGATORS TEETH = SMMA (MEDIAN PRICE, 8, 5)
ALLIGATORS LIPS = SMMA (MEDIAN PRICE, 5, 3)
Now to calculate the alligator indicator the three different lines has to be calculated and before then we get the median price first. There are lots of formulas around traders can use to calculate the alligator indicator, but for this we will use the formula I provide here.
Now let's interprete the terms of the indicator's formula;
Where;
- Median price is the middle price
- HIGH is the highest price of the candle stick bar usually at the top of the bar.
- LOW is the lowest price of the candle stick bar.
- SMMA meaning the Smooth Moving Average.
- Then finally the SMMA (MEDIAN PRICE, A, B) means that the Smooth moving Average will be Calculated over a median price with a period of A adjusting over a B period.
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 the Alligator Indicator
Adding the Alligator Indicator like every other Indicator has a simple process as I'll be explaining.
- First you log into the platform https://www.tradingview.com/ and then proceed to choosing the crypto pair of your choice, here I choosed the BTCUSD asset pair.
Screenshot from tradingview showing how to add the alligator indicator
- Then click on the fx Indicator at the top of the chart and the call out below pops up.
Screenshot from tradingview showing how to add the alligator indicator
- Then I proceeded to choose the alligator indicator and it was added immediately to the chart.
Screenshot from tradingview showing how to add the alligator indicator
- Now after we have successfully added the indicator to the chart. Now let us show how to configure the Indicator.
Alligator Indicator Configuration
Screenshot from tradingview showing how to configure the alligator indicator
- Now after adding the indicator to the chart, now let's show how to configure the indicator. As seen above you click the setting button and the call out portal as seen below comes up.
Screenshot from tradingview showing how to configure the alligator indicator
- Now first is the Input were this has to do with the period or length of the indicator. Here I configured the indicator to the value I wise as seen above. Were I changed the indicators Jaw, Teeth and the lips period to my desired value.
Screenshot from tradingview showing how to configure the alligator indicator
- Now after the input I proceed to the Style and the style has to do with the colouration of the indicator. Here a trader can choose to Change it to what ever he/she wants and it should be to colour that won't confuse the trader himself.
Screenshot from tradingview showing how to configure the alligator indicator
- Now we proceed to the Visibility, here the visibility are the seen displays around the Indicator, there are the extra noise around the Indicator, this can be configured and removed so the Indicator has reduced it zero noisiness around the indicator. Now after all the configuration we then click on ok for it to be actualized on the indicator.
Screenshot from tradingview showing final result
is it advisable to change its default setting?
Now alot of times it is advisable to leave an indicator on the default settings that is the setting the owner set it at. But then some very experienced traders who know what the want in an indicator can go ahead and set the indicator to thier test.
Looking at the alligator indicator it is considered as a bit of a complex indicator because if the three smooth moving averages backed up with the offsets, so any trader wishing to change has to have enough knowledge on it.
Secondly, part of the alligator default period numbers are based on the Fibonacci Series which is a very important part of the resistance and support levels of any trade, therefore it's importance to be included in this indicator.
But then due to a traders knowledge and confidence he or she can reset the Indicator to his or her test.
How do we interpret this indicator from its 3 phases: the period of rest(or sleep), awakening, and the meal phase?(Screenshot required)
Alligator Indicator Phase Interpretation
Now the alligator indicator is divided into three phases and the understanding of this phases is what will help the trader succeed.
The Period of Rest(or sleep)
Now the period of rest of the indicator is likened to the period at which the real alligator is at rest, here all the part of the alligator mouth comprising of the Jaw, the Teeth and the lips are inactive, so at this stage there is no eating. This period is considered as the period of rest. The chart below will give us a relationship of this real life alligator resting phase and the alligator indicator resting phase.
Screenshot from tradingview showing Alligator Indicator's rest phase
So the BTCUSD Chart above shows the resting phase of the alligator indicator. Here the indicator proceeds in a range that is a sideways continues movement. This shows that the indicator and the market price are at a state of rest were there is no trend either upward or downwards. Here a trader should be watchful because after this is always a break out either to the bear or bull direction.
Awakening Phase
Now the Awakening Phase of the real life alligator is when he/she awakes from sleep. Now it is worthy of note that the longer the alligator sleeps then the more voracious it will start searching for food when it wakes. So when the alligator wakes up it has over come the sleeping phase the it opens it's mouth to start looking for food to consume. Now let's confirm this as see the chart below.
Screenshot from tradingview showing Alligator Indicator's Awakening phase
Now looking at the BTCUSD Chart above, the alligator indicator is awake from sleep and it start a search for food as seen above were there is a market entry and mouth opening. This shows the waking phase of indicator were it start making trend either up or down which shows the activeness of the alligator in real life.
Now it is worthy of note that the direction of the trend depends on the positioning of the mouth parts of the indicator. So in this case the Lips is below the Jaw, showing downtrend.
The Meal Phase
Now this is the last phase of the alligator indicator and I'll term this the alligator take profit state. Here the alligator in real life finally gets to find the food to eat which he was searching for at the awakening stage. So after he has finally eaten the alligator will then go back to the state of rest depending on it he/she has eaten enough. So looking at the chart below let's confirm this on the alligator indicator.
Screenshot from tradingview showing Alligator Indicator's Meal phase
Now looking at the chart above, the alligator indicator finally closes it's mouth and that happens because it has seen a meal to eat. After eating the indicator goes back to rest or takes another trend move depending on if the alligator has eaten enough or consumed enough. So the whole process is repeated or altered depending on the state of the alligator.
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)
Trend Prediction
Now trends can be predicted using the alligator indicator and this can be done very easily. Now as seen earlier the alligator indicator goes through three phases but then the first phase where the indicator makes no significant moves either upwards or downwards which is the sleeping Phase has to take a new part after that which is either for it to go up or down. So we will be seeing below how the alligator indicator helps in that direction.
Bullish Trend Prediction
Screenshot from tradingview showing trend prediction
Now like I earlier said, it is a very easy process using the alligator indicator to identify trend. So for this case, to identify the bullish trend, the Green alligator line will always be on top of the blue indicator line. This is always so when the indicator is not showing false signal.
Bearish Trend Prediction
Screenshot from tradingview showing trend prediction
Likewise for the bearish trend prediction using the alligator indicator, the except for the case of false signal, the blue line is always on top of the green alligator line. As seen above on the BTCUSD asset pair chart it shows same as I have just stated.
Explain how the Alligator indicator is also used to understand sell / buy signals, by analyzing its different movements.(screenshot required)
The Buy/Sell Signal identification using the Alligator Indicator.
Now the most important part of an indicator is it ability to help identify entry and exit point of a trade. Now the alligator indicator helps point this out by showing this two signal point, the buy and sell signals. The points below will help us identify that.
The buy signal is always seen when the Green Indicator line is on top of the blue indicator line.
The sell signal usually seen when the Blue indicator line is on top of the Green alligator line.
The buying point usually at the beginning of an Uptrend, it is good a trader waits for some confirmation(up to 3 to 4 periods ahead) before proceeding to take such entry move to avoid fake out.
The sell taking point is based on the traders expertise and preference. Meaning that while some traders prefer to take thier sell trade when the alligator indicator crosses over it's self again after the Uptrend to make a downtrend reversal and some might not wait till then, preferring to advance with thier decision before the mouth of the indicator closes.
In other to use this indicator successfully to enter and exit trades then proper trade management should be imbibed, like using the take profit and stop loss properly.
The points make above can be seen in the chart below.
Buy and sell signal screenshot from trading view platform
Do you see the effectiveness of using the Alligator indicator in scalping trading style? Explain this based on a clear example.(Screenshot required)
Alligator Indicator in Scalping Trading Style
Scalp trading using the alligator indicator. Screenshot from trading view
The scalp trading style just as the name implies to Scalp is a trading style were a trader uses a small time frame like minutes abd seconds to take advantage of trading position. It can also be called the intra-day trading, were profit are taken between the times of a day. But then this type of trading requires a trader to be fix to his trading as often as possible to take advantage of the tides or volatilities of a the timely trades.
So to the alligator indicator being incoperated it can make the work much more easier for the trader. As seen from the above BTCUSD chart, the volatility level is much so the trader needs some level of confirmations before entry into each trade, since he/she needs a hand full of trading entries to make a reasonable profit. Therefore introducing the alligator indicator I have pointed out the various levels profit taking point which that was easily done with the help of the indicator, though showing late signals in most cases but then combined with the candles is profitable to the scalping trader.
But then for more confidence in the part of the trader he/she can introduce another indicator.
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.
Combining other Indicators with the Alligator Indicator
Yes!! It is very necessary to combine the alligator indicator with other Indicators and this is so because there is always a need on any indicator to always filter out false and late signals like in the case of the scalping trader which I made of mention in the other question.
Another reason why it is necessary is that no one indicator is 100 Percent therefore there is always a need to support it with another to avoid losses and unnecessary failed trades or take outs. Let's confirm this using the graph below.
The Alligator Indicator combined with theMACD indicator
Now looking at the BTCUSD asset chart pair above, we can see the alignment of the alligator Indicator with the MacD indicator.
Giving a little insight into the MacD Indicator, the MacD indicator is divided into two sections, which are 0 to -100 and 0 to 100. Here when the indicator line falls between the 0 to -100 section then the market price is tend towards the bearish trend and also when it is on the 0 to 100 section then the asset chart will tend towards a bull, at the zero line trailing shows a range market.
So putting this on with the chart above we can see how the MacD indicator, progressed in consonant with the alligator indicator, showing trend confirmations and assurance for trade proceedings.
But there are cases were the alligator indicator might give some failings like the case of late signals which might cause traders especially the scalper trader from cashing in on what will result in a highly profitable trade. So the chart below shows us were the MacD Indicator corrects this cases of late signal notification by the alligator indicator.
MACD Indicator correcting late signals by the alligator indicator. Screenshot from tradingview
List the advantages and disadvantages of the Alligator indicator.
Advantages of the Alligator Indicator
Works well on all timeframe and trading styles.
There are limited number of false signal posed by this indicator. You can practically count the number of false signals because of it fewer available and this is as against the single lines indicators.
It is very easy to use and interprete, therefore it will work well for beginners and intermediate traders.
Works well in combination with other indicators.
Disadvantages of the Alligator Indicator
Very noticeably the alligator indicator shows too many late signals which is the major reason it should be combined with other indicators to signal this out for a successful trading expedition.
Some pocket of false signals though comparatively fewer.
Due to late signal renderings traders can loose out from important trades.
Conclusion
Conclusively, the alligator indicator which is a trend signaling Indicator is generally a very interesting Indicator looking at the origin of the indicators concept. But then to fully utilize indicator to the advantage of the trader there is always a need to combine it with other Indicators to avoid errors and fake out.
And the very importantly also, even after there has been two or three other indicators combined there is a very vital need to risk manage your trade to avoid unnecessary losses.
Thank you
