Search
Close this search box.

Alligator Trading Strategy: 50 Key Concepts Every Trader Should Know for Success

Alligator Trading Strategy: 50 Key Concepts Every Trader Should Know for Success

Alligator Trading Strategy Guide

The Alligator Trading Strategy is a powerful trend following trading strategy designed to extract profits from the financial markets. The core idea is based on the science of chaos and it uses a specific indicator called The Alligator Indicator. 

The Alligator Trading Strategy used the powerful Alligator Indicator which is a super powerful trend indicator. The Alligator indicator unveils the secret fractal geometric nature of the market which is hidden from the traders eyes. 

To understand The Alligator Trading Strategy we must first understand the concepts behind The Alligator Indicator and then we shall dive into how to extract maximum profits from the market while always remaining on the correct side of trend. 

Bill Williams and Chaos Theory in Technical Analysis Financial theorist Bill Williams incorporated principles from chaos theory to develop his trading methodology, most notably reflected in the Alligator indicator. While traditional technical analysis often relies on linear relationships, Williams recognized the inherent complexity of markets, influenced by a multitude of dynamic factors. Chaos theory, which explores seemingly erratic systems with underlying order, provided a framework for his approach.

Key Concepts from Chaos Theory

  • Market Non-Linearity: Williams challenged the limitations of linear technical analysis. He argued that market behavior is inherently non-linear, influenced by a complex interplay of psychological, economic, and social forces. Chaos theory offered a lens to understand this intricate structure.
  •  Identification of Underlying Order: Core to chaos theory is the principle that apparently random events can be governed by hidden patterns. Williams aimed to identify these patterns within price movements using the Alligator Trading Strategy via Indicator.
  • Energy and Market Dynamics: Williams adopted the concept of “energy following the path of least resistance” and applied it to market behavior. The Alligator’s (Trading Strategy) three moving averages converge during periods of low volatility, signifying a “sleeping alligator” and suggesting potential market consolidation. Conversely, when the lines diverge, it represents a “hungry alligator” and a potential trend formation, offering entry or exit signals for traders.

Beyond Pure Chaos

It’s crucial to note that Williams did not subscribe to the pure chaos theory notion of completely unpredictable markets. He believed there were discoverable underlying structures within market movements, deviating from the core tenet of true chaos.

Alligator Trading Strategy and Chaos Theory Application

The Alligator Trading Strategy and Indicator comprises three moving averages with different smoothing periods. These lines converge when there’s no clear trend (low volatility), representing a “sleeping alligator” and potentially signalling a pause in trading activity according to Williams’ theory.

Conversely, when the lines diverge, it signifies a “hungry alligator” and a potential trend, with the breakout direction guiding potential entry or exit points for trades.

In essence, Bill Williams leveraged concepts from chaos theory to develop a trading approach that focused on identifying trends and market inefficiencies, not on predicting random price movements. This approach challenged the limitations of traditional linear technical analysis and offered a framework for traders to navigate the complex dynamics of financial markets.  

What is the Alligator Indicator w.r.t Alligator Trading Strategy?

“Legendary trader Bill Williams, an early pioneer of market psychology, developed the trend-following Alligator indicator, which follows the premise that financial markets and individual securities trend just 15% to 30% of the time while grinding through sideways ranges the other 70% to 85% of the time. Williams believed that individuals and institutions tend to collect most of their profits during strongly trending periods.” Investopedia According to Dr Bill Williams, they used mainframe computers (at the time the fastest computers)  to arrive at this trend-conforming indicator. 

The Science of Chaos: 

The Alligator Indicator is based on the science of chaos. The Alligator is our “compass” – it shows us the direction of the trend and is very much in tune with the structure of the market. My take on this in 2022 is that no matter what Bill may call it, it is a set of 3 moving averages and they work pretty well. That is all I need to know. 

Anatomy of the Alligator Trading Strategy

The Alligator is made of three smooth-moving averages, shifted into the future. The picture below shows an open gator with its three-line not touching each other.

The Balance Blue Line (The Jaws)

Interpretation and Use of Information Provided by the Blue Line

Alligator’s Jaw (the Blue Line) – is a 13-period smooth moving average, at the mid-price (High+Low)/2, offset 8 bars into the future. The Blue line is the Balance Line for the price on the current time frame. The price will come to the Blue Line when there is no new incoming information.

This means when the volatility goes down, the momentum will fall and the price will stop travelling up and down; it starts going sideways and the Alligator catches up with the price. When the price is close to the Blue Line, it is said to be at its Balance Line.

This means that the buyers and sellers might have found a balance. When the price goes sideways, with all three lines intertwined we say, the Alligator is sleeping and that the market has reached its Balance Line. It is also called the equilibrium point.

When there is new incoming information, the price starts going away from the Balance Line and the Alligator opens its mouth.

The rise and fall of momentum is also represented in the form of a histogram by AIMS AO (explained below). The Blue Line mimics AIMS AO as well. You must pay attention to the relationship between the Blue Line and AIMS AO. The Blue Line is the trend and the Balance Line of the current time frame.

Alligator Trading Strategy Best Timeframes

AIMS The Gator or Bill Williams Alligator Values (Alligator Trading Strategy Timeframes)

The Hot Red Line (The Teeth)

Interpretation and Use of Information Provided by the Red Line

Alligator’s Teeth (the Red Line) – is an 8-period smooth moving average, at the mid-price (High+Low)/2, offset 5 bars into the future.

The Red Line is the Balance Line of the significant lower time frame. When the price is above the Red Line on M5 we start looking for a buy Setup on M1.

When the price is below the Red Line on M5 we start looking for a sell Setup on M1. We have a mechanism to display the Red Line of M5 on M1 – it’s called the Purple Line.

Red Line is the trend and the Balance Line of a certain lower time frame. Alligator’s Lips (The Green Line) – 5-period smooth moving average, at the mid-price (High+Low)/2, offset 3 bars into the future.

The Faster Green Line (The Lips)

Interpretation and Use of Information Provided by the Green Line

The Green Line is the Balance Line of a significant lower time frame, even lower than the Red Line. Just like the Blue Line, it also has a relationship with AO but with AO of the 5 times lower time frame. The green line is the trend and the balance line of a lower time frame.

What is the AIMS Gator? (For Alligator Trading Method)

Now that you know about the Alligator and the relationship of the lines it should be easy for you to understand that the AIMS Gator which is the “Multi-Dimensional Alligator”. We trade in the direction of the five times higher time frame (5xHT).

Wouldn’t it be nice to know what the Alligator of the five times higher time frame telling us? In order to do so, we have chosen to display on M1 otherwise referred to as “the current time frame” or “the trading time frame” , the information provided by the Red Line on M5 otherwise referred to as the “higher time frame” or the “5XHTF”.  AIMS Gator shows us the Red Line of M5 on M1. AIMS Gator has a built-in Alligator with added Magic Purple Line. Alligator Strategy is our Compass whereas AIMS Gator is our Map.

The Magic Purple Line: 

Interpretation and Use of Information Provided by the Purple Line

The Purple Line is the trend of 5 times higher time frame. The Purple Line – is a derivative of the Red Line of 5 times higher time frame. On M1, it is the Red Line of M5. In the next section, we discuss how to use the information provided by AIMS Gator to help with our trading decisions.

Alligator Trading Strategy Best Timeframes

The Purple Magic Line – trend of the 5 x higher time frame

TradingView Version of Magic Purple Line:

We have made the magic purple line available to TradingView users for FREE. Click on this link to add this script to your favourites.


What is the Sleeping Alligator?

We generally want the Alligator to ‘sleep’ before we start looking for a trading opportunity. In price action terms this means, we want to see a tight trading range before we look for trades. Forex traders also call this the “Squeeze”.

Usually you will see Tight “FLAT AIMS Boxes” around the gator lines. The Alligator is considered asleep when the three lines are intertwined and horizontal.

We want the Blue, Red and Green Lines to be intertwined and inside the AIMS Box (Also explained in the Lesson AIMS The Box Indicator). If the Purple Line is intertwined as well then that means both the current and the 5 times higher time frame might be in a tight trading range.

We DO NOT want the Purple Line intertwined. This means, that box the current and the 5 time higher time frame have a trading range. When the Alligator is sleeping we get excited, looking for a range breakout and a new trend to begin. We will take trades based on the previous trend before the Gator Fell Asleep. We will trade the breakout or a pullback inside the trend. Price must be going AWAY from the Purple Line.

3 lines in Alligator Trading Strategy by iTradeAIMS

Sleeping Gator and a perfect setup one to buy HPQ in Aug 2021To the right of the blue vertical line, the lines have opened to the upside with Green above Red and Red above Blue. The Alligator’s mouth is supposed to be open to the upside and as such, it is hungry and wants to eat. (Watch out traders)

The Equilibrium Point and the Path of Least Resistance

In the words of Bill Williams (rip), Everything is energy and energy follows the path of least resistance. The market is also energy. The energy of the market also follows the path of least resistance. In the markets, the path of least resistance is ‘Price Going Away from the Alligator’s Mouth’.

What Bill meant was this: He was trying to say that The Alligator shows the trend. When there is in imbalance between buyers and sellers the market i.e. price will either go up or down. When it does, the moving averages will follow price and indicate a TREND. When the Alligator is sleeping, the price is at the equilibrium point. The energy flow of buyers and sellers is at a ‘zero point’. Which simply means that there is either one of the following 2 situations.

  1. Tug of War: There is tug of war between buyers and sellers and hence the price can’t seem to trend in up or down direction. If there were more buyers than the sellers then the price will start to increase or vice versa for sellers and price going down.
  2. Lack of Volume: There is little interest in this market and so there isn’t a higher volume of buying and selling happening. Imagine going into a busy market on a bank holiday. Empty stalls and shops with shutters down.

When the market is in either of the 2 situations it could be said that it is like being at the top of a mountain – right at the peak of it. It requires less effort, at the peak of the mountain, to move a rock and let it roll downwards. The “path of least resistance is downwards”. When the rock starts rolling, it becomes increasingly difficult to stop because it would require a considerably larger amount of energy and force to stop it. The force of gravity pulls it down harder and harder.

A little change at the start can have substantial effects later. (The Butterfly Effect)

To take advantage of this point in the time-space-reality of the markets, we patiently wait for the Gator to sleep tight before looking for trading opportunities. A sleeping Gator usually only requires a small stop loss and all trends start from this point. At this point “We don’t care which way the market moves, we just want to be in it when it does”.  Edit: 2017- Actually we do care because we don’t want to trade into The Purple. So we always trade away from the purple line.

What is the Awake Alligator or Open Alligator?

We say the Alligator is awake with its mouth open: when the Alligator Lines – Blue, Red and Green Lines – have opened to the up or downside.

LONG TRADES ONLY

If the Alligator’s mouth is open to the upside and above the Purple Line, we only take Long Trades

In this example of HPQ chart we see Open Gator on the 5 times higher time frame to the right. And we see sleeping gator, within tight boxes and purple underneath it. It is a Perfect Setup 1 Buy SetupIn the example below, USD/JPY is shown on the Daily Chart to the left and the the four hour chart to the right. A perfect example of a sleeping gator on the current i.e. Trading time frame with an open gator on the 5x higher time frame, that is the chart to the left. We want to trade in line with the trend.

USDJPY Daily and 4 Hourly Chart – Open and Sleeping Gator – Perfect Bullish SetupBreakouts in the Direction of the TREND. That’s the MOTTO of AIMS.

SHORT TRADES ONLY

If the Alligator’s mouth is open to the downside on the 5XHTF and Gator is Sleeping on the Current Time Frame and price is below the Purple Line, we take only Short Trades

NASDAQ100 chart with a sleeping gator and a perfect setup 1 short. Picture at the time of Setup. (Before)The BEFORE Picture Above: Alligator Strategy lines are open to downside on the chart to the left, which is the NASDAQ100 chart on the 4 hour. On the right we see a 3 minute chart, with a perfect Setup 1. Alligator is Sleeping, purple is above the sleeping gator inside the tight box. It’s a SHORTS only Bearish Setup 1. The AFTER Picture Below: Below we see the completed Setup 1 Sell Trade. I traded this myself and it was great fun.

This was a great setup 1 sell trade. A Beautiful trade (AFTER)Next:  A full picture of the sleeping Alligator and the awake Alligator

How Does Alligator Trading Strategy Show the Future of the Market?

Please make sure you understand that the lines are shifted into the future – that is to the right of the screen. For example, on a one-minute chart at candle time at 8.00, the Blue Line will be at 8.08; the Red should be at 8.05 and the Green at 8.03. When the 8 o’clock candle has a Blue Dot and you want to check the rules, you will have to consider that the lines are shifted into the future.

Multi Dimensions of Alligator Lines

Note that the lines are shifted into the future – that is why we have two dimensions of the Alligator. One dimension is the lines relative to where the current price bar is; another is the end of the lines. To find out if the mouth is open or closed you would look at the ends of the Alligator lines. Whereas to find out if price closed above/below Green or Red Line, you would look at the position of the lines relative to the current price bar close.

Taking Your Alligator Trading Strategy to the Next Level

Imagine having access to custom indicators tailored just for you, comprehensive eBooks that explore the Alligator Trading Strategy and other secret methods for success, and a supportive community of like-minded traders. Don’t miss out on this opportunity to transform your trading experience.

Picture of Jay C.
Jay C.

iTradeAIMS

2 Responses

Leave a Reply

Your email address will not be published. Required fields are marked *

This site uses Akismet to reduce spam. Learn how your comment data is processed.