Alligator indicator is a technical analysis tool used in trading. It consisting three lines overlaid on chart and is used to find trend and future direction of trend. 
This indicator was introduced by Bill Williams in his 1995 book "New Trading Dimensions". main purpose is to show the emerging market trends and determine optimal entry points. According to Bill Williams, the Alligator is a combination of three"balance lines".Each of them is a variation of the Simple Moving Average, shifted ahead of the current market price.
structure of Alligator indicator consisting of three smoothed moving averages with periods of 5,8 and 13, which all are Fibonacci numbers. Each of the lines is moved ahead for a certain period of time, that depends on the short-term or long-term orientation of that particular line.
1) The Alligator's Jaw (green) is a 13-period SMA, moved into the future by 8 bars;
2) The Alligator's Teeth (blue) is an 8-period SMA, moved into the future by 5 bars;
3) The Alligator's Lips (yellow) is a 5-period SMA, moved into the future by 3 bars.
Majority of traders use Alligator indicator for defining trend strength and formation of new .
- Defining trend strength
For finding trend strength distance between the lips and the teeth and distance between the teeth and the jaw has increased after the trend had changed its direction.
- Predicting a new trend
In finding new trend amplitude of moving average lines starts to increase, the new trend will likely to be observed soon.In bullish trend lips of alligator should be positioned above the teeth and jaw line and intersection of teeth and jaw should be observed. In bearish trend lips should be cross the intersection of teeth and jaw in downward position.
calculations behind Alligator indicator is given below.
Simple moving average (SMA):
Subsequent values are:
- the sum of closing prices for N periods;
- smoothed sum of the previous bar;
- smoothed moving average of the first bar;
- smoothed moving average of the current bar (except for the first one);
- current closing price;
- the smoothing period.
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