How to use Williams Alligator Indicator in crypto trading?

Hello, Skyrexians!You've probably heard of the Alligator indicator, a tool used by top cryptocurrency traders. This powerful instrument can enhance the performance of any cryptocurrency trading strategy and help you capitalize on market opportunities. The Alligator gives us precise insights into whether the price is currently in an impulsive or corrective wave. This knowledge is incredibly useful when building your own crypto trading strategies or even when developing automated trading bot strategies. Even if you employ a grid bot strategy, the Alligator can boost your return on investment because it's vital to set up a grid bot during corrective waves and sideways movements. So, what exactly is this beast called the Alligator? Let's dive deep into this topic today!

What is Alligator? 

The Alligator is one of the best indicators for trend detection. It consists of three moving averages known as the jaw, teeth, and lips. Moving averages are frequently used in algorithmic trading bots and can be exponential, smoothed, or weighted, depending on the specific crypto trading algorithm. In this case, we will use smoothed moving averages (SMAs).

• Jaw (blue line): A 13-period SMA shifted 8 bars into the future. This represents the balance line of the current time frame, for example, the daily chart (1D).
• Teeth (red line): An 8-period SMA shifted 5 bars into the future. This is the balance line of a lower-degree time frame, such as the 4-hour chart (4H).
• Lips (green line): A 5-period SMA shifted 3 bars into the future. This serves as the balance line of a time frame that's two degrees lower, for example, the 1-hour chart (1H).

Please be careful when using the Alligator indicator on different cryptocurrency trading platforms. Ensure that you check the correct settings and moving average type to maintain accuracy in your analysis.

Trend detection with Alligator

The main feature of the Alligator indicator is its ability to detect trending markets and identify those that are about to make significant moves in any direction. This powerful tool can enhance your crypto trading algorithm when used correctly. For example, on the BTC price chart, the Alligator indicator can be observed exhibiting two primary conditions: sleeping and hungry.

Sleeping Alligator: This occurs when all the lines—the jaw, teeth, and lips—are crossing each other and the price. This phase can take up to 80% of the time and represents a market cycle stage where trading might be less advantageous. It's a period to be cautious and prepare for the upcoming trend.

Hungry Alligator: After a prolonged period of consolidation, the price selects a trend direction, leading to an impulsive move. During this phase, the Alligator's mouth is widely opened, and the lines do not cross the price.

Distinguishing a trending market is crucial because such markets can offer opportunities for significant profits. In contrast, range-bound markets may not provide sufficient price movement to generate meaningful returns. Many stop losses are triggered while the Alligator is sleeping due to the lack of clear direction. Here's a useful tip: if you use Elliott Wave analysis, you don't necessarily need to identify the exact wave the market is in. Instead, focus on entering during impulsive moves and avoid corrections.

How to trade with Alligator

Now comes the most interesting part: how to start crypto trading using the Alligator indicator. Our basic strategy is to wait for the price to create the first fractal above/below the Alligator’s mouth and place a conditional order to buy/sell one tick above/below the fractal’s top/bottom. We'll delve into fractals in detail next time, but for now, it's important to understand how to utilize the Alligator.

Here's another hint from our experience: use fractals only when the Alligator has been sleeping for a long time. For instance, after a prolonged period of consolidation and a fractal breakout, Bitcoin showcased one of the most severe bear market in history, but using Alligator you could earn.

As for when to close the trade—almost at the bottom! When the price starts showing weakness, it's a signal that we don't need to be in the market anymore. By using this strategy on the weekly (1W) time frame, you can hold short trade throughout an entire bear market and close them before a bull market begins. Fantastic, isn't it?

Conclusion

In this article, we discussed how you can implement the Alligator indicator in your trading routine. This tool will help you avoid stagnant markets where you might only lose money and instead catch every significant move. Moreover, you can detect sideways markets if you use a cryptocurrency trading bot that profits in range-bound conditions. This is certainly not the only strategy using the Alligator indicator. Next time, we'll enhance our approach with other tools and see in detail how the Alligator improves profitability. Additionally, we'll soon have a live stream where we practice trading with the Alligator. See you next time!

Best regards, Skyrexio Team