The Alligator Index, as its name suggests, is highly effective at biting down on trading opportunities, or more appropriately, momentum opportunities. The Alligator Indicator is comprised of three SMMAs, or three Simple Moving Averages, that run on averages. The three SMMAs are aptly named the Jaw, the Teeth and the Lips.
The Jaw, the slowest SMMA, runs on a 13-day period.
The Teeth, in the middle, is an SMMA that runs on 8-day period
And the Lips, the most important, is a 5-day SMMA and it is the fastest.
The logic is simple and resembles the moving averages cross strategy. The strategy has three different signals.
The Alligator Mouth Open Bullish—that is when the Lips are above the Teeth and the Teeth is above the Jaw. When the three SMMAs align this way it is a signal for a bullish momentum and a buy.
The Alligator Mouth Open Bearish—this is the exact opposite of the bullish signal, with the Lips below the Teeth and the Teeth below the Jaw.
The Alligator is Sleeping—if the price starts to move in a more horizontal manner or if the averages diverge, it is called an Alligator Sleeping, which is another way to say there’s no trend.
When to use the Alligator Indicator
The Alligator Index’ strength is in its unique quality. It is a momentum index and yet it is most effective over the long term rather than short term as may be expected with a momentum index.
“Eating” and that is a bearish trend. Naturally, an Alligator Eating Bullish signal would be the mirror of the bearish signal with the Lips on top.
When the Alligator is Sleeping
The reason that the Alligator Indicator Sleeping mode is somewhat more complicated is because it is more difficult to recognize and also because it could either be a signal to keep holding the position or to close it, depending upon the buildup.
Using the same chart but with a different overlay we can focus on the tools and rules that help us recognize a Sleeping Alligator.
The first notable sign our Alligator Indicator has gone to “Sleep” is a wave that moves horizontally, or at least more horizontally than the preceding wave. This is clearly demonstrated by the blue arrows overlaid on the chart. When the price wave moves more horizontally and as long as the Lips are not crossing the Jaw, it is a signal to hold your position rather than close it—the trend is not over.
The second sign, which is also a warning, is if the averages start to diverge and cross one another. The Lips crossing the Jaw is not only a sign of a Sleeping Alligator but also a sign to close the position.
An important pitfall to avoid could occur after the cross; the Lips returns to cross below while the wave is still horizontal, as seen in the final wave in the chart. Because the wave is still horizontal the Alligator is still sleeping and because it was a close sign, it means we should not have reopened a position.
It is also important to look at the length of the Alligator Sleeping Phase compared to the Eating Phase that preceded it. If the Alligator Sleeping Phase is much shorter, don’t expect a trend change. Only after the Alligator is sleeping longer than the preceding Alligator Eating wave can a change in trend be the logical assumption.
Finally, another important practice that will help you avoid an Alligator pitfall is to always use an Alligator Indicator in conjunction with an MACD indicator. If the Alligator was Sleeping and suddenly turns into an Alligator Eating Bearish signal (or Bullish Signal if it is a bullish trade), and the MACD suggests weakening momentum, then the Alligator might be sending a false signal and is therefore still in a Sleeping Phase.
Great, basically U wouldent take a trade in five months (acc to first example.)….Very useful.
Shaun Overton says
While we’re wallowing in thick sarcasm… “Are we in a casino or are we trying to take the best trades possible”? Too many people confuse activity with productivity.
Ohhh, sorry six months…
David, SMA works in any timeframe… e. g. you can try this strategy in 1 minute chart if you want?!
KC Lawler says
Trading is a timing issue..period…….and that timing can be generated in different ways depending on the trading style…there has been millions made with moving averages……this example…is a simple trend is on or off type indicator…..very valuable……..especially if your a trend trader or a swing trader……….the time scale used will improve or diminish its result…it is a visual help
Shaun Overton says
Very well said.
paul nelson says
It seems that SMA trend line is a valuable analytical tool. Just think of that .. Can we fight against the White rater rapid while kayaking??? Answer is NO!. The question for you Shaun, What can SB Score can do??? long term or short term???
It surely can cut the pips losses if use rightly. If use SMA for trend trade rightly. And its how we execute our trades and without SB Score we have to figure out how many pips losses that we can buffer. I would say ranging 300 to 500 pips buffer to finally get on the forex train. With SB score, it can possibly cut down the pip losses if use rightly and can combine with SMA.
Shaun Overton says
The SB Score is short term. Even in the strongest bull markets, 30% of the bars will go against the trend.
And yes, using the SMA is a very good idea.