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Financial Dictionary - Alligator trading

Alligator trading

Also known as Alligator Forex , it is a guide for  studying upward or downward stock market trends by analysing their direction and strength, and for spotting promising investment opportunities. It is widely used, as it is both effective and easy to interpret.

More precisely, this indicator identifies the absence of any trend, the emergence of any particular trend and, once it occurs, the direction it follows. It was developed by US analyst and market psychology pioneer Bill Williams, on the basis that any trader is experienced enough to understand the structure of the market and to know how to detect and interpret certain measures that indicate the presence or absence of trends. It thus gave rise to an original terminology to replace the traditional ATR or RSI indicators.

To determine a alligator's behaviour (whether it is sleeping or eating), Williams used three moving parameters or balance lines. The relationships of balance and convergence or divergence of these three averages will determine the market signals.

First, the jaw of the alligator (blue line) is the slowest moving average with its 13-period moving average; secondly, the teeth of the alligator (red line) is an 8-month smoothed moving average; and lastly, the lips of the alligator (green line) is the fastest mover with its five periods.

As mentioned earlier, the alligator indicator detects three cases: In the absence of trends, the three indicator lines are close or intertwined. This means that the creature is sleeping; the market is quiet and everyone is waiting for a change of state to occur. It will be closing time, so best to close open positions and refrain from further trades until the alligator wakes up.

When this happens, a trend is formed and the three indicators begin to diverge. At this point the alligator will start to eat, and we need to remember that the longer it has slept, the longer it will spend hunting. It is now time to reopen, and we will be able to spot whether we should buy or sell, depending on the direction of the alligator's mouth.

Finally, while the market is trending the alligator will be sated; meaning it is time to earn a profit. In a nutshell, knowing how to read the signals is the path to success, as sometimes the lines can be confusing. In any case, the key to interpreting alligator trading correctly is to compare the balance lines with other indicators and trading strategies as rapidly as possible. it is important not to lose too many points when a trend starts.

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