Alligator and Gator oscillators are one of many indicators developed by trader Bill Williams who tried to capture investors’ psychology and to identify periods of most intense activity. Observing price histories, he noted that the market is mostly stationary, about 70-85 percent of the time. While 15-30 percent of the time market generates trend, which derives most of the profit. Trades during those periods are called “a blind chicken market” alluding to well-known jest.
Indicators work best when used as supplements and thus help traders in interpretation. Alligator oscillator is plotted on the price chart and is constructed by calculating three moving averages of median prices for each period. Namely, 13-period smoothed moving average (shifted 8 bars in the future) is called Alligator’s Jaw plotted in blue color; 8-period SMA (shifted 5 bars in the future) indicated as Alligator’s Teeth plotted in red and 5-period SMA (shifted 3 bars in the future) Alligator’s Lips plotted in green.
Depending on interactions between three SMAs, the Gator oscillator will be in a specific form and indicate different market conditions. Gator oscillator is plotted below the price chart showing two histograms from both sides of zero line. Bars are green or red depending on whether the values are higher or lower than the previous one. Positive bars lying above the zero line represent the absolute difference between the Alligator’s Jaw and Alligator’s Teeth, the 13 and 8-period SMA. On the contrary, negative values are the absolute difference between the 8-period and 5-period SMA, thus Teeth and Lips with added negative sign.
Four market states are identified by Gator and Alligator indicators.
Market is considered to be sleeping, showing no trend, when the Alligator lines are intertwined or close to each other. In that situation, Gator is showing red bars on both positive and negative sides. The traders are advised to stay out of the market in this period.
After sleeping, the awakening is following. It is the indication of the trend and is said that Alligators’ mouth is widening. SMAs are moving apart and bars in Gators are different colors on both sides at the same time. Traders should open positions depending on the direction.
The Eating phase is depicted by green bars on both sides of the zero line. The trend is continuing allowing trader to increase the profits.
As red bar appears and SMAs are narrowing it signals Alligator is sated meaning the eating phase is ending. Those levels are profit take levels and traders should exit their positions. Alligators is than falling asleep with red bars on both sides in Gators.