Alligator Indicator

The Alligator indicator, developed by Bill Williams, is a technical analysis tool designed to help you identify the presence and direction of market trends. It uses three smoothed moving averages (SMMAs) set at three Fibonacci-based periods—13, eight, and five—to help identify trend movement.

Each moving average period is identified using the following labels and color codes:

Each one is offset forward (into the future) to indicate convergence/divergence relationships.

Williams created this indicator on the premise that trends occur only 15% to 30% of the time, with the remaining periods consisting of sideways or non-trending movements. The Alligator was, therefore, designed to signal the “awakening” of a new trend from its non-trending, or “sleeping,” state.

The Alligator indicator is calculated using three smoothed smoothed moving averages (SMMA):

The calculation of the smoothed moving average (SMMA) itself for a given period is a bit more involved as it considers the previous period’s SMMA value and the current period’s price.

The three lines—Jaw, Teeth, and Lips—make up the Alligator's mouth, and the relationship between these lines helps to identify trend presence, direction, and potential market entries and exits. The forward shift of these averages is intended to help project future potential price movements, aiding in trend confirmation.

To interpret and use the Alligator indicator, you should be able to identify the three market phases—sleeping, awakening, and hungry—and how each phase corresponds to the Alligator’s three moving averages: the Jaw (blue line), Teeth (red line), and Lips (green line). The chart below displays the Alligator action in the chart of SPDR Gold Shares ETF (GLD).

A “sleeping” Alligator corresponds with a non-trending market. In this condition, the three Alligator lines are intertwined or very close together, indicating a lack of trending movement. Sleeping Alligators are typically found during a market consolidation phase in which there’s no clear direction. Generally, you’d avoid trading during this phase of the market.

During the “awakening” phase, the Lips (green line) crosses the other lines (Teeth and Jaw). This indicates the likelihood that a new trend may be forming; hence, the Alligator is "waking up," so to speak. For some traders, this crossover may signal a potential entry point; for others, it alerts them that a significant market movement may be underway. The direction of the cross (upward or downward) indicates whether the potential trend may be bullish or bearish​.

Once the trend gathers strength and momentum, the three moving average lines will separate and expand. In this market phase, the Alligator is considered “hungry.” At this point, traders who haven't entered their positions (long or short, depending on the direction of the trend) will likely be waiting for the next opportunity to do so. The point here is to ride the trend until you see signs of exhaustion or reversal, typically when the three lines converge again.

As a set of actionable signals, you might consider entering a trade (long or short) during the “awakening” phase. Ideally, you will want to see the Alligator shift into a “hungry” phase, which signals a strengthening trend. If the trend is already established, you should finesse your market entry using a trading setup that aligns with your preferred trading strategy.

Conversely, consider exiting your position when the lines converge. This indicates that the Alligator is about to enter a resting or “sleeping” phase and that the trend is weakening.

To increase the reliability of the signals, the Alligator indicator can be combined with other technical analysis tools, such as oscillators or volume indicators, which can help confirm the Alligator’s signals.

The Alligator Indicator helps analyze trends and generate trend-based entry and exit signals. This indicator highlights the different phases of the market—represented by the sleeping, awakening, and hungry Alligator conditions—and emphasizes the importance of timing in trading strategies. You might consider using the Alligator with other technical analysis tools to boost the indicator's accuracy, confirm trends, and refine your trading decisions.