The Williams Alligator is a real trading technique, not a vicious reptile. Though, as with any financial trading, if you don’t do your homework thoroughly, it could well turn around and bite you.
The alligator term was coined by legendary Wall Street trader Bill Williams, and represents the stylised shape of an alligator’s head on a line graph created by three different sets of prices.
The lines for this alligator indicator are drawn from three types of smoothed simple moving average (SMMA) – more on smoothing in a moment. The time periods they are based on (often known as bars, as in a bar graph) could be anything from 5-minute periods to days.
- The jaws of this imaginary alligator are represented by a 13-period SMMA, moved into the future by eight time periods
- The teeth are represented by an eight-period SMMA, moved forward by five time periods
- The lips are a based on a five-period SMMA, moved into the future by three periods.
Those Fibonacci numbers keep cropping up and all the numbers in this alligator trading strategy – 3, 5, 8, 13 – are Fibonacci numbers, which are also used in other trading systems, not just the alligator indicator trading system.
So, let’s just recap briefly on moving averages. A simple moving average is the average price of a stock over a set number of days. If the price of widgets is increasing by £1 every day over a 10-day period, starting at £1, the average will be the sum of (1:10) ÷ 10, or 5.5.
On day 11, the first day’s figure drops off and day 11’s is added – so the average is moving from day to day, creating a simple moving average (SMA). You can then go on to create an exponential moving average (EMA), which weights the calculation more towards recent prices, to avoid time lag in the graph.
Smoothed moving average
In an SMA you lose historic data at the start of a time period every time you add new data; in a smoothed moving average, old data is never completely removed, but rather included as a weighting.