The Alligator Long-Term Reversal Strategy
The Alligator is one of the most powerful trend indicators. Dozens of strategies have been based on it, some of which have already been reviewed on our site. However, all of them have been focused on a small signal period. In this article we will look at a trading system based on the same Alligator from Bill Williams, but with a greatly extended period and a minimum shift. The signal filtering is done with another indicator from the same developer – the Awesome Oscillator.
The strategy is long-term but when used on a 5-second time frame, 1-minute contracts can be traded.
Overview of the indicators and the strategy
The market is in an active trend phase no more than 30% of the time. The Alligator, created by Bill Williams, makes it easy to determine not only active price movement, but also movement forecasted for the near future. The tool consists of 3 Moving Average curves with a special averaging formula. Intertwined with each other in a certain combination, they form signals. What matters is not only the sequence of lines, but also the distance between them. The combination of the 3 curved lines (red, blue, and green) is usually called the alligator’s mouth. The indicator has 4 phases which traders refer to as follows: sleeping, awake (main signal), eating, and full.
The Awesome Oscillator is a simple oscillator made in the form of a histogram. The calculation of values is also done according to the formula for calculating the arithmetic mean value, but with a number of modifications. The shape of the histogram largely reflects the distance between the curves of the Alligator when used in its standard settings, but it does not repeat them exactly as it does on the MACD. Bill Williams called his indicator the «Awesome Oscillator» because of its capabilities for technical analysis. It fully reveals its potential in combination with other indicators from the same developer.
The strategy is based on the differentiation of trend reversals. The extended Alligator period allows you to ignore small price fluctuations. It is only sensitive to strongly pronounced trends, which is the optimal time to enter the market. The Awesome Oscillator is used in this combination as a signal filter.
This strategy is exclusively for Binomo (site). It can be used on other sites, but you should independently find the optimal combination of time frame of the chart and expiration term. In our case, these parameters are set to a 5-second interval and 60 seconds for the duration of the trade. Any asset will be suitable for trading, but we recommend choosing CRYPTO IDX. On a 5-second time frame, only the crypto index is able to produce full-fledged price formations. The low volatility of ordinary currency pairs does not allow for a full-fledged Japanese candle to form in 5 seconds.
- Alligator – the period parameters: jaws – 50, teeth – 20, lips – 15, shift of all lines – 1;
- Awesome Oscillator – the indicator has no adjustable period parameters.
A strong increase in the Alligator period leads to a decrease in the distance between the curves. Therefore, it is recommended to manually increase the vertical scale of the chart by scrolling in the area of the left vertical scale of the chart, where the asset quotes are indicated.
Trading signals on the strategy
When trading on this strategy, the trader should be patient and skip over most of the signals. The optimal point to enter the market is the moment of reversal of a pronounced trend. Given the small 5-second interval of the chart, you will not have to wait long – 12 candles can fit in 1 minute.
- The signal for a fall is the intersection of the green and red curve at the reversal of a downward trend, as well as the transition of the blue line from the lowest position to the highest one. Confirmation of the signal is the formation of red bars below the N/A line.
- The signal for a rise is the intersection of the red line with the green line, as a result of which it briefly acts as the lower border of the alligator mouth. Then the blue curve goes downward. Confirmation of the signal is the appearance of ascending green bars above the N/A boundary.
The picture above shows examples of the correct signals for this strategy. As you can see, right before the intersection of the lines and the «awakening» of the Alligator, the blue line lags significantly behind the other two. In this case, it can be used as an indicator of volatility. If all the lines are a tight beam, then this is a sign of low market activity and the absence of pronounced trends. Traders are advised not to trade in that situation.