Alligator indicator is a free indicator that comes free with metatrader platform. You can check it under indicators and you will find it. It was developed by Bill Williams. This is a very good indicator for determining the trend.

How the alligator indicator is made of?

The alligator indicator is made by three smoothed moving averages

1)      13 SMA shift 8 Blue color – called Alligator’s Jaw

2)      8 SMA shift 5 Red color – called Alligator’s Teeth

3)      5 SMA shift 3 Green color – called Alligator’s Lips

The following picture shows you a metatrader chart with an alligator indicator on it.

Forex Alligator Indicator

How to use the Alligator Indicator:

The basic trading technique is when the red moving average crosses the blue moving average, trade in that direction. When the red moving average crosses the blue moving average again exit the trade.  Check the following picture. The red moving average crosses the blue moving average and it’s this is where enter a sell trade. This is identified a point 1 in the picture. When the red moving average crossed the blue moving average again exit the trade. This is identified as point 2 in the picture.

Using Alligator Indicator

But the market doesn’t always goes in a trend as shown in the above picture. A lot of times the market goes in to choppy conditions. Around 60% of the time the market goes into choppy conditions. Check the following picture. In the following picture the red moving average cross the blue moving average but the trend did not following that direction.

Choppy Market Conditions

This is where you have to be careful. This is where you can use other indicators to enter or exit trading. One of the techniques I use, I wait until the alligator indicator to clearly spread out that means there is enough distance between all the three moving averages and there are no clear or strong support or resistance lines. Then use a stochastic oscillator to enter trading. In the following picture the trend is clearly upwards as the alligator moving averages are far apart and there are no support or resistance lines. Then wait until the price reverses back. Wait for the oscillator indicator to reach the oversold region. Once it reaches the oversold region wait for it to cross above the oversold region. Then enter a long trade. Once the price goes up some number of pips, let’s say 20 or 30 you can move the stop loss to your entry. Once the stochastic reaches the overbought region you can exit the trade.

Alligator indicator and Stochastic Oscillator