Alligator Trading Strategy

Another indicator of our discussion is Alligator. This indicator is interesting because it shows a beginning of the trend movement. You cannot use it as a basic indicator because it gives trading signals quite rarely but its lines can be used as support and resistance. A creator of this indicator seemed to be romantic and described how it worked in the following way:

1) Alligator is sleeping – all lines are entwined and horizontally located. When Alligator is sleeping the market is under flat and the Alligator’s jar, teeth and lips are crossing each other. The longer Alligator sleeps the hungrier it gets. This is a rule of the technical analysis - the longer a sideways trend or price consolidation is the stronger price movement will be after.

2) Alligator awakes – the indicator lines begin to widen, Alligator is hungry and starts hunting for the price. When a distance between the lines becomes longer it means that Alligator opens its mouth. The direction where Alligator opens its mouth shows a trend direction.

3) Alligator is not hungry – the indicator lines move closer and its mouth is going to be shut. In such cases Alligator does not want to eat and is going to sleep and “digest” the price. Closing the Alligator’s mouth signalizes about the end of the current tendency. It is better to close all your deals and wait for the next Alligator’s hunting.

A signal of a stronger bearish tendency – Alligator’s mouth is opened

We see a signal to trade when the price chart breaks out the slowest indicator line or Alligator’s jar, a confirmation of the price direction is “closing the mouth”- the slowest line is crossed by both fast lines (lips and teeth).

A procedure after a signal appearance:

1) Add Alligator indicator to the chart;

Add an Indicator

Indicator Settings

2) Wait when the price chart has crossed the slowest indicator line – the jar (a red line on the picture);

3) After closing the mouth (a fast line of lips crosses a slow jar line) buy an option in the opposite direction from the jar line.

A signal about the end of bullish tendency– Alligator closes its mouth and you can buy a put

Advanced use of Alligator indicator

The Alligator lines can be used as support or resistance. If the price has reached the fast lips line (a violet line on the picture) it is a signal for bounce trading. We can accept this signal if the jar line has been broken out.

A procedure after a signal appearance:

1) If a candlestick closes at the Alligator’s lips line or outside we can wait for a signal appearance;

2) A signal will be a candlestick in opposite direction from the indicator lines, a strong signal will be if a candlestick is closed prior to the lips line;

3) We buy an option in the bounce direction after a confirmation: the following candlestick closes in the same direction.

A signal to buy a call after the Alligator’s lips bounce