The last ten articles have been entitled Analysis Toolbox and we discussed the various market cycles including trends and continuations. This next part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. (for a free 2-week trial CLICK HERE)
In the last series, called The Trader’s Pendulum, we took you through the 10 Habits, all aimed to support a successful trader. Your mission in developing these habits is to get out of the Technical Trader’s Trap and transform into an Entrepreneurial Trader so that you can start being accountable to your trading. We invited you to take action and begin your journey by completing the Trader’s Scorecard (www.fxtradersedge.com/scorecard) and to get down to business by arranging a free coaching session. In this Indicator Series, we talk about the mechanics of trading.
|Created by Bill Williams. The Alligator is a combination of balance lines (moving averages) that use fractal geometry and non-linear dynamics. It consists of 3 lines: Jaw, Teeth and Lips. Typically, a smoothed moving average (SMMA) is used with periods/ shifts of (13/8, 8/5, 5/3) respectively for the lines.|
On the MotiveWave platform, the input choices are Open, High, Low, Close, Midpoint, Typical Price and Weighted Price. The method choices include EMA (Exponential Moving Average), SMMA (Smoothed Moving Average), MEMA (Modified Exponential Moving Average), WMA (Weighted Moving Average), KAMA (Kaufman Adaptive Moving Average), DEMA (Double Exponential Moving Average), TEMA (Triple Exponential Moving Average), TMA (Triangular Moving Average) and VWMA (Volume-Weighted Moving Average). The Alligator, as defined by Bill Williams (one of my mentors in the late 90’s!), uses the blue 13 SMMA for the jaw period with a shift of 8 periods; the red 8 SMMA for the teeth period with a shift of 5 periods; and the green 5 SMMA for the lips period with a shift of 3 periods. Notice all the moving averages are from the Fibonacci sequence
The Alligator is a trend following indicator that produces trades during trend moves (which Williams found to occur about 30% of the time) and sits out during sideways markets (occurring 70% of the time). Williams steered away from sideways markets, believing that individuals and institutions could make their money when the strong trends emerged. That also meant sitting with one’s hands tied until the Alligator opened its mouth to eat up trend trading profits. I loved Williams imagery, creativity and simplicity in describing market opportunities and the Alligator is one such character that he developed to help traders simplify and visualize their opportunities.
USING THE TOOL
The Alligator provides trading signals when the Lips cross down below the Teeth and the Jaw, signaling a sell. When the Lips cross upwards through the Teeth and Jaw, that signals a buy opportunity. Because the Lips use a sensitive 5-period SMMA, it turns the fastest and the Jaw, which uses a 13-period SMMA, turns the slowest among the 3 averages.
Williams refers to an uptrend or downtrend signal as the Alligator awakening. The first thing an Alligator does upon awakening is to open its mouth and yawn. As the Alligator smells the food of a Bull or a Bear, the Lips, Mouth and Jaw separate, and the market is either bullish with long positions in order, or bearish with short positions in order, as the Alligator is eating with his mouth wide open. When the market runs out of steam and the Alligator is sated, the SMMA’s converge, indicating the Alligator has had enough profits to eat, so profit taking and repositioning is in order from a trader’s perspective.
When the market is sideways and the Lips, Mouth and Jaw are crisscrossing due to choppy markets, the Alligator is sleeping and traders should sit on the sidelines waiting for the Alligator to wake up and start eating again. The longer the Alligator sleeps, the hungrier it becomes upon awakening. Traders beware of the false trading signals when the Lips cross above the Mouth and Jaw, only to find itself losing steam and crossing back the other way.
In the S&P example below, with the daily chart on the left and the 15-minute chart on the right, it illustrates that the Alligator can be used on different time frames. Each time frame can be traded separately, or they can be traded as a team, meaning, entries and exits can be taken on the 15-minute chart with the daily trend in mind. For example, with the daily uptrend entrenched, one can use the 15-minute Alligator to take long positions once the Alligator becomes hungry and opens its mouth wide to eat profits. The 15-minute Alligator can also be used to take profits once the Alligator becomes sated and starts to sleep.
The Alligator is a wonderful trend-following system which teaches patience when the Alligator is sleeping and confidence once the Alligator wakes up and starts eating.
See you next week for another “A” indicator!
If your mission is to become a trader or investor who stays out of the Technical Trader’s Trap, then take the leap to grow into an entrepreneurial trader.
I created the FX Trader’s EDGE Coaching Program modelled after the “10 Habits of Successful Traders”, which is the title of my newly published book by Wiley.
The Trader’s Pendulum: The 10 Habits of Highly Successful Traders. Copyright (c) 2015 by Jody Samuels. This book and ebook is available at all bookstores, online booksellers, and from the Wiley web site at www.wiley.com.