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In Bill Williams’s book, New Trading Dimension: How to Profit from Chaos in Stocks, Bonds, and Commodities, the Alligator was first mentioned. It is a type of strategy based on smoothed moving averages (SMMA) that assist in determining the presence or absence of the trend and as well as its direction.

The Alligator is composed of 3 SMMA:

Alligator’s Jaw’s (blue line) – the longest period line with 13-period smoothed moving average built at the median price (High + Low)/2, then moved into the future by 8 bars.

Alligator’s Teeth (red line) – the middle period line with 8-period smoothed moving average built at the median price (High + Low)/2, then moved into the future by 5 bars.

Alligator’s Lips (green line) – the shortest period line with 5-period smoothed moving average built at the median price (High + Low)/2, then moved into the future by 2 bars.

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Hunting with this creature is dangerous if you’re not careful with it. It could snap you off easily if your analysis did not conform with its  behavior. So the first thing you have to know is how the Alligator behaves.

If all 3 lines (Jaw, Teeth, Lips) are intertwined with each other, then the Alligator is sleeping. The longer it sleeps, the hungrier it gets. But always remember that you shouldn’t bother it when it sleeps, so do not open any trade. When it starts to hunt, that’s the time that you had to make your move.

If the Jaws (blue) are at the bottom, then the Teeth (red) is at the middle, then followed up by the Lips (green)  at the top, it signifies that the trend is going on an upward direction. On the other hand, if the positions are reversed wherein the Jaws (blue) are at the top followed by the Teeth (red) at the middle and Lips (green) is at the bottom then the movement of the trend is downward.

After feeding, the Alligator sleeps again and you have to wait until it wakes up and feed again. Elliot wave traders can work best with the Alligator because it helps to identify the impulse and corrective waves. If the price trades outside the Alligator’s mouth then impulse waves are forming but when it is on the Alligator’s mouth, the corrective waves are forming.

Stephen Stevenson