Alligator Strategy – Rules of the StrategyFriday, 22 December 2017 09:07
Alligator Strategy is a trading method in the Forex market, which uses the same name Bill Williams’ indicator.
The author expressed his views about the market in his book «Trading Chaos». However, many traders begin applying this technique, not being familiar with the theoretical basis of his work. That can be explained by lexical specific features of the author. In the book, Williams used lots of definitions, invented by himself, and which you will never find elsewhere. Even so, behind his unusual metaphors, there are quite studied algorithms of technical analysis and verified simple formulas. The principle of this trading strategy is based on basic regularities of price movements. This allows receiving simple and secure signals.
Fundamentals of Alligator Strategy
Following Alligator Strategy, technical analysis is provided using the same name indicator, Acceleration and Awesome Oscillator, and fractals. Each of these tools is installed by default in almost every MetaTrader terminal. ATR with a period of 10 is used as a signal filtering. A moving average with a period of 200 and the additional line at a distance of 50 pips from the main one are also used. You should do it in the «Levels» tab when adding the MA indicator on the chart. With the help of this additional line, it is possible to identify the overbought and oversold areas.
To open a deal following Alligator Strategy, you should ascertain whether the several conditions are met. First of all, wait for the moment, when Alligator will «sleep»:
- Three curves are intertwined;
- The indications of AO fluctuate around the zero value;
- Acceleration crosses a zero mark.
Such market conditions on a long timeframe look like a flat, and on a short timeframe, they do not show an evident trend. After that, you should find the last peak, or the «valley» of the flat movement, which is beyond the Alligator line. Fractals are used for this purpose, and, depending on their type, the Strategy advises:
- For bullish fractals – open a Buy Stop at a distance of one pip;
- For bearish fractals – open a Sell Stop.
Advantages and Disadvantages
When testing Alligator Strategy, many traders indicated a large number of false signals. Very often, the breakdown of the indicator curves can simply be the price fluctuation under the conditions of lateral movement. After that, the fluctuation calms down, and the chart continues weak fluctuations. For this reason, some participants of the market refuse from applying of the pending orders, and open deals manually, when a «jaw» of the indicator fully closes.
Also, among other downsides of the strategy is a delay of trading signals, which involves a risk of entering the market at the moment when the price signals are dying out. ATR will help to cope with this problem:
- If at the moment when a fractal appears, the indications of ATR are located below the signal curve, the volatility has not still reached the critical level.
- If the indicator’s line is directed upwards, this suggests the creation of a signal. In a lower and horizontal direction, there is a high probability of returning to the lateral trend.
Exit from the Position
In Alligator Strategy, Stop Loss orders are placed near the opposite extremes. To exit the market, you can follow the following methods:
- Placement of a Take Profit. Its value should be as three as much than a Stop Loss. At the same time, there is a probability of huge profit loss, if the trend is strong.
- Manually close the order after five successive candles of the same color have closed. Many experts don’t advise to use this method.
- Exit when Alligator lines are met again. At the same time, you can open new transactions when the new breakdown appears.
Alligator Strategy allows to get a stable profit, provided that it is properly used. Experienced traders advise trading on a D1 timeframe since this timeframe is rarely affected by random fluctuations. Accordingly, you risk less. Also, we also advise you to test Alligator Strategy on a demo account before starting real trading.