Why does this strategy have such a name and how can it help to identify a trend
You’ve been trading stocks for a while now and feel ready to take your skills to the next level. The alligator indicator strategy is a tried-and-true method used by pros to determine when the market is trending and when it’s ranging. When the alligator’s mouth is open, it means the market is ranging—time to stalk your prey and pounce. When the alligator’s mouth is closed, the trend is strong—just go with the flow and enjoy the ride. Mastering the alligator strategy is like awakening a sleeping beast within you, giving you a sixth sense about market movements and the confidence to trade with the big boys. If you want to become a trading pro and have the market feeding from your hand, it’s time to wake up your inner alligator.
What Is the Alligator Trading Strategy?
The Alligator Trading Strategy gets its name from the pattern that forms on candlestick charts, with a long green candle followed by a small red candle with a short upper shadow, and a long red candle. It signals a potential reversal in the trend.
What triggers an alligator pattern?
An alligator pattern forms after a sustained upward trend. The first candle is a long green bullish candle showing strong buying pressure. The next candle gaps up but has a small red body and long upper shadow, indicating the bulls tried to continue the rally but the bears took over and pushed prices down, leaving the upper shadow.
The third candle is a long red bearish candle, showing the bears have taken control and the rally is over. The alligator’s mouth has opened! This pattern suggests the bullish trend may be ending and a bearish reversal could be on the cards.
How can traders take advantage of the alligator?
There are a couple of ways traders use the alligator strategy:
- Short sell as the alligator’s mouth opens, placing a stop above the high of the first green candle. The aim is to profit from the reversal.
- Wait for confirmation the trend has reversed, like a lower low, then short sell for a higher chance of success. The downside is you may miss part of the move.
- Go long again if the alligator’s mouth closes, and a bullish reversal pattern forms. But be cautious, as the trend may remain bearish.
The alligator strategy works best in highly volatile markets. Be aware of the risks, use stop losses, and don’t get eaten alive if the alligator wakes up in a bad mood!
How to Use the Alligator Indicator
To unleash the power of the Alligator indicator, you’ll need to know how to spot the jaws and use them to your advantage.
Finding the Jaws
The jaws are the two points where the fast and slow moving averages cross. The fast average is the upper jaw, while the slow average is the lower jaw. When the jaws come together, it signals that a trend reversal may be on the horizon.
Going Long: Buying the Breakout
Once the jaws come together, watch for the fast average to break out above the slow average. This signals that momentum is building and the trend is reversing to the upside. Buy immediately. Ride the momentum as the fast average pulls away from the slow average.
Going Short: Selling the Breakdown
Conversely, if the fast average breaks down below the slow average after they come together, it signals a reversal to the downside. Sell immediately to take advantage of the downward momentum. Stay short until the averages eventually come back together.
Exiting the Trade
Close your position when the averages come back together after a breakout or breakdown. This indicates the trend may be ending and volatility is slowing. Take your profits before they potentially disappear.
The Alligator indicator helps you spot trend reversals and jump on them quickly. With some practice, you’ll be trading like a pro and watching your profits add up. Stay patient and let the indicator do the work for you. The Alligator awakens!
Tips for Trading With the Alligator Strategy
The alligator strategy is a powerful trading technique, but it does take some practice to master. Here are a few tips to help you trade confidently with the alligator:
Start with the daily chart
When you’re first learning the alligator strategy, focus on the daily chart. This will give you a broad view of the alligator’s behavior and make the signals easier to spot. Once you get the hang of it, you can move on to shorter time frames.
- Look for the alligator’s jaws, teeth and lips to open and close. When the lines are far apart, the alligator is “sleeping” – this signals a ranging, non-trending market. When the lines come together, the alligator “wakes up” and is ready to feed – indicating the start of a trend.
Confirm the signal
Don’t rely only on the alligator lines crossing to determine if it’s time to buy or sell. Look for other indicators like price action, volume, or momentum to confirm the signal. For example, if the lines are coming together and price is clearly breaking out of a range, that helps validate that the alligator is waking up and a trend may be starting.
Set stop losses
Always use stop losses when trading with the alligator system. Place your stop just beyond the alligator’s “lips” or most recent swing point. This will limit your losses if the signal turns out to be false and the alligator goes back to sleep. It’s best to be conservative with your stop losses until you get familiar with how the alligator behaves.
Review and refine
Keep a trading journal to review how the alligator strategy is performing for you. Note any false signals or losing trades and look for ways you could have avoided them. See if there are any patterns in the most profitable trades. Refining your understanding and technique over time will make you a master alligator trader.
So there you have it. The alligator indicator strategy can help you find the best entry and exit points and spot trends before the crowd. It may take a little practice to master, but with time you’ll be spotting those alligator jaws opening and closing like a pro. Remember, look for the distinctive pattern, be patient for the right setup, and once you see that jaw start to open, it’s time to pounce. Use tight stop losses at first as you get the hang of it. Pretty soon, you’ll be riding the alligator for some tasty profits. The alligator is awake–are you ready to take a bite? Time to hop on board and enjoy the ride. See you on the other side!
What parts does an Alligator indicator have?