There is scientific research behind it and Bill Williams used supercomputers to arrive at this trend-confirming indicator.
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.
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 picture below shows AIMS Gator with the purple line added to it. You also see the BOX indicator. The box is very much in tune with the Gator.
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 price will stop travelling up and down; it starts going sideways and the Alligator catches up with price. When the price is close to the Blue Line, it is said to be at its Balance Line. 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. When there is new incoming information, 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 relationship of the Blue Line and AIMS AO.
The Blue Line is the trend and the Balance Line of the current time frame.
Alligator's Teeth (the Red Line) – is 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 price is above the Red Line on M5 we start looking for a buy Setup on M1. When 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 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.
Green Line is the trend and Balance Line of a lower time frame than the Red Line.
Now that you know about the Alligator and the relationship of the lines it should be easy for you to understand that the AIMSigator is the “Multi-Dimensional Alligator”. We trade in the direction of 5 times higher time frame. 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, information provided by the Red Line on M5. AIMSigator shows us the Red Line of M5 on M1. AIMSigator has built-in Alligator with added Purple Line.
The Purple Line is the trend of a 5 times higher time frame.
The Purple Line – is a derivative of the Red Line of 5 time higher time frame. On M1, it is the Red Line of M5.
In the next section we discuss how to use information provided by AIMSigator to help with our trading decisions.
We generally want the Alligator to ‘sleep’ before we start looking for a trading opportunity. 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 (explained later in this chapter). If the Purple Line is intertwined as well then that is even better. When the Alligator is sleeping we get excited, looking for a range breakout and a new trend to trade.
In the picture above, Alligator is sleeping in the area to the left of the blue vertical line. To the right of the blue vertical line, the lines have opened to the upside with Green above Red and Red above Blue. The Alligator mouth is open to upside.
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’.
When the Alligator is sleeping, price is at the equilibrium point. The energy flow of buyers and sellers is at a ‘zero point’.
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.
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”.
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 down side.
LONG TRADES ONLY
If the Alligator’s mouth is open to the upside and above the Purple Line, we only take Long Trades
SHORT TRADES ONLY
If the Alligator’s mouth is open to the downside and below the Purple Line, we take only Short Trades
Above: Alligator lines are open to downside, Purple appears to be inside the AIMS Box but it's actually above the blue line and indicating a trend change.
Next: A full picture of the sleeping Alligator and the awake Alligator
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 8.00, the Blue Line will be at 8.08; Red should be at 8.05 and 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 in to future.
Note that the lines are shifted in to 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.