The Williams’ Alligator modifies moving averages and can be combined with fractals and the Awesome Oscillator to create a trading strategy.
- Bill Williams created the Alligator indicator, a modified version of moving averages that helps to identify trend changes.
- Bill Williams also popularised fractals, which are used to identify support and resistance, entry points and exit points.
- The Awesome Oscillator shows the momentum behind a market move and provides several signals to enter a position.
What is Bill Williams’ Alligator?
Created by trader and psychologist Bill Williams, the Alligator is a trend following system that works in a similar way to moving averages. The Alligator is made up of three components:
- Jaw (blue line): simple moving average (13 periods), smoothed by eight periods.
- Teeth (red line): simple moving average (8 periods), smoothed by five periods.
- Lips (green line): simple moving average (5 periods), smoothed by three periods.
These three lines provide signals when they cross over each other. For example, if the lips crosses above the teeth and jaw, then it usually indicates that an uptrend is beginning. In contrast, if the jaws crossed below the teeth and lips, then a downward trend may be imminent.
The metaphor of an Alligator is used to describe the market. When volatility is low, and the market is not trending, the Alligator is said to be ‘asleep’ since the jaw, teeth, and lips are intertwined. However, as volatility increases and the market beings to trend, the Alligator’s mouth opens as the price forms a new trend.
The chart below shows an example of a crossover in the Alligator. After a downward trend that pushed bitcoin from $8,140 to a low of $7,729, the Alligator eventually gave a signal that the trend may be changing.
On September 30th, the lips crossed the teeth at 09:30, providing the first sign of a trend change. At this point we may want to open a small long position at $7,917, the opening price of the 15-minute candlestick where the lips crossed above the teeth.
Just under an hour later, the lips continued to rise and crossed above the jaw, which confirmed the formation of an upward trend. At this point, the trader might want to add to the existing long with a substantial position.
As displayed above, once the Alligator confirmed an upward trend, the price of bitcoin rose from $8,010 to a high of $8,364. During the uptrend, the lips remained above the teeth and jaw and trended higher together.
However, the lines of the Alligator indicator started to intertwine around 21:00. The Alligator is said to be ‘asleep’ at this point as the market is not moving in any direction, suggesting the current trend is over. It would have been a good time to take profits from any long positions after a green candlestick.
Using the Alligator with Fractals
The Alligator is not the only trading indicator that Bill Williams introduced. Williams also popularised the use of fractals, which can be combined with the Alligator to formulate an effective trading strategy. The Alligator can tell us when the trend is likely to change but when combined with fractals, multiple entry points are highlighted as the trend unfolds.
Consider the chart below. Before the Alligator completes a crossover and signals the start of an uptrend, the price action posts a fractal high above the Alligator. This provides a buy signal if the price manages to break above that level at $7,914.50.
Every fractal high above the Alligator should trigger a buy position. Conversely, every fractal low below the Alligator should trigger a sell position. The chart above shows that during the short-term uptrend eight buy signals were given before the Alligator fell ‘asleep’ and signalled the end of an uptrend.
Almost an hour after the fractal high at $7,914.50 was posted, the market price broke this level and was trading above the Alligator, motivating an entry into a long position. Similarly, the price established fractal highs above $8,000 and went onto break these levels as well. For each fractal break, you would enter a new long position and scale in as the market trends higher.
But not long after the market establishes fractals at $8,322.50 and $8,364.00, the Alligator starts to intertwine with itself and it said to be ‘asleep’, meaning that the trend has been exhausted. The buy signal at $8,634.00 is not triggered, while the one at $8,322.50 would have been triggered before the lips went back below the teeth - which is a signal that the uptrend ended.
So out of eight signals, seven would have been triggered before the Alligator fell ‘asleep’, one would have been unprofitable while the other six signals would have been profitable. The strategy combining the Alligator and fractals involves entering multiple positions as the move in the market unfolds.
Adding the Awesome Oscillator
Adding an oscillator helps to gauge the momentum behind a market move. The Awesome Oscillator is calculated as the difference between a 34-period moving average and a 5-period moving average using the midpoint of each session rather than the closing price.
One signal given by the Awesome Oscillator is when the indicator moves above or below the zero threshold:
- A positive value for the Awesome Oscillator signals short-term momentum is increasing faster than long-term momentum. As the Awesome Oscillator moves from negative to positive, this could present a good buying opportunity.
- A negative value for the Awesome Oscillator signals short-term momentum is falling faster than long-term momentum. As the Awesome Oscillator moves from positive to negative, this could present a good selling opportunity.
The chart above illustrates how you can use Awesome Oscillator to complement the Alligator and fractals. For example, the Awesome Oscillator moved into positive territory as the market opened at $7945.50, highlighted on the chart. After the small red candle, the market continued higher and the trade would have been profitable.
Another signal given by the Awesome Oscillator is known as the saucer. The chart above displays a bullish saucer which is defined as two declining red bars above zero that is followed by a green bar and indicates a rapid change in momentum. The bullish saucer would have indicated to enter a long position on the break of $8,168.
An example of a bearish saucer is shown below. Notice that the Awesome Oscillator is negative, and one red bar follows two consecutive green bars (where the first green bar is lower than the other).
Once the bearish saucer is formed, traders should look to enter a short position once the market breaks below the low of the final candlestick associated with the saucer. For example, in the chart above, we see that the low of the relevant candlestick is $8,289. So when the market moves below this level, you would enter a short position.
In summary, the Williams Alligator works a bit like moving averages. The trend following indicator can be enhanced by adding fractals and the awesome oscillator for a complete trading system.