Williams' Alligator technical indicator is a combination of three Balance Lines (Moving Averages):
The three moving averages comprise the Jaw, Teeth, and Lips of the Alligator:
Jaw (blue line) – a 13-period smoothed moving average built at the median price (High + Low)/2, shifted forward by 8 bars;
Teeth (red line) – an 8-period smoothed moving average built at the median price (High + Low)/2, shifted forward by 5 bars;
Lips (green line) – a 5-period smoothed moving average built at the median price (High + Low)/2, shifted forward by 3 bars.
The Alligator Indicator helps determine the presence or absence of the trend as well as its direction.
If all the three lines are crossed, it means that the Alligator is “sleeping”. At this time, the market is trading in a small price range, or is trading flat, taking away the trader’s profit made during the previous price movements. The longer the Alligator sleeps, the hungrier it gets. As a result, the next price movement will be stronger. While the Alligator sleeps, you should not open new trades. When the Alligator “awakens”, it opens its jaws (balance lines diverge) and starts chasing the price. Having eaten enough, the Alligator falls asleep again (balance lines converge).
If the Alligator does not sleep, there is an upward or downward trend in the market (the price runs away from the Alligator). If the price is above the Alligator’s jaws, this indicates an uptrend; if the price is below the Alligator’s jaws, this indicates a downtrend.
The Alligator can be used as an additional indicator to identify Elliot waves. If the price is outside the Alligator’s jaws, the impulse wave is being formed in the market. When the price is inside the Alligator’s jaws, the corrective wave is emerging.
Calculation of the Alligator Indicator:
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)
MEDIAN PRICE — the mid-price;
HIGH — the maximum price of the bar;
LOW — the minimum price of the bar;
SMMA (A, B, C) — smoothed moving average (A – smoothed data, B – period of smoothing, C – the shift);
ALLIGATORS JAW — Alligator’s jaw (blue line);
ALLIGATORS TEETH — Alligator’s teeth (red line);
ALLIGATORS LIPS — Alligator’s lips (green line).