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The Alligator Indicator, developed by Bill Williams, is a trend-following tool that uses three smoothed moving averages to identify market phases: sleeping (consolidation), awakening (trend forming), and feeding (strong trend). Its unique visual structure helps traders time entries and exits more effectively.
Wondering when the market is ready to trend or just moving sideways? In this guide, we’ll explore how the Alligator works and how to apply its signals on XM trading platforms, a practical approach for those who want to learn trading with clearer trend detection and timing strategies.
What Is the Alligator Indicator by Bill Williams?
The Alligator indicator, developed by Bill Williams, is a trend following tool designed to identify market phases specifically when the market is sleeping (ranging) or waking up (trending). It uses three smoothed moving averages with different time shifts to visualize market momentum and direction.
Who Is Bill Williams and Why Did He Develop the Alligator Indicator?
Bill Williams was a pioneer in trading psychology and technical analysis, best known for creating several indicators such as the Alligator, Awesome Oscillator, and Fractals. He introduced the Alligator to help traders recognize the cyclical nature of market behavior specifically, the transition between consolidation and trend formation.
His theory, outlined in his book Trading Chaos (1995), likens the market to an “alligator” that sleeps during low activity and awakens when a trend begins, helping traders avoid false signals and trade with directional bias.
What Are the Components of the Alligator Indicator?
The Alligator consists of three SMMA (Smoothed Moving Averages), each with different periods and shifts:
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Jaw (Blue line): 13-period SMMA shifted forward by 8 bars – represents the long-term trend filter.
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Teeth (Red line): 8-period SMMA shifted forward by 5 bars – medium-term sensitivity.
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Lips (Green line): 5-period SMMA shifted forward by 3 bars – short-term momentum.
These lines dynamically adjust based on price action, allowing the Alligator to signal the beginning and end of a trend. The structure is visually intuitive and helps determine entry/exit zones.
What Does the Alligator Indicate About Market Conditions?
The spacing and interaction between the three lines provide insight into the market state:
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When the lines intertwine or cross frequently, the Alligator is “sleeping,” signaling a non-trending or sideways market.
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When the lines spread apart and move in the same direction, the Alligator is “awake,” signaling a strong directional trend.
According to analysis by the University of Manchester, Department of Quantitative Finance (2021), the Alligator indicator, when used with volume or breakout confirmation, improves trend-entry timing and helps avoid overtrading during low volatility phases.
How Does the Alligator Indicator Work?
The Alligator indicator functions by analyzing the alignment and separation of three smoothed moving averages to determine the market’s current phase whether it’s consolidating (sleeping) or trending (awakening). It helps traders recognize trend development and avoid false entries during low-activity periods.
When Is the Market Considered “Asleep” According to the Alligator?
The market is seen as asleep when the three lines Jaw, Teeth, and Lips intertwine or overlap with no clear direction.
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This condition suggests that price is moving sideways, momentum is weak, and no trend has formed.
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It is often accompanied by low trading volume and low volatility, signaling that traders should wait before entering positions.
A study from the University of Zurich, Department of Behavioral Finance (2020) showed that avoiding trades during these “sleep phases” using the Alligator reduces whipsaw losses by 19% in forex and commodity markets. If you’re new to this tool or need assistance setting it up on your platform, don’t hesitate to contact XM for guided support and technical help.
When Does the Market “Wake Up” According to the Alligator?
The market is considered awake when the lips line (green) crosses above or below the teeth and jaw, and all three lines start to fan out in the same direction.
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This expansion indicates the beginning of a new trend, supported by increasing price momentum and volume.
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The clearer and wider the separation, the stronger the trend confirmation.
This approach aligns with principles described in Bill Williams New Trading Dimensions (1998), where the “Alligator’s awakening” signals the trader to actively follow the emerging trend.
How Does the Alligator Confirm a New Trend Direction?
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A bullish signal occurs when the lips cross above the teeth and jaw, followed by all lines expanding upward.
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A bearish signal occurs when the lips cross below the teeth and jaw, with all lines diverging downward.
These crossovers, paired with directional line spread, provide early confirmation of trend initiation. According to backtests conducted by the Singapore Management University’s Trading Lab (2022), Alligator-based entry signals yielded higher risk-adjusted returns when combined with breakout patterns on 1H and 4H charts.
Trading Strategies with the Alligator Indicator
The Alligator indicator, is a powerful tool for identifying market trends and spotting entry opportunities based on the behavior of three smoothed Moving Averages Jaw (blue), Teeth (red), and Lips (green). Below are practical and proven strategies grouped by trading context, along with a key insight: knowing when not to trade is just as important as knowing when to enter.
Alligator Awakening Strategy – “The Crocodile Wakes Up”
This strategy focuses on early trend detection right after a consolidation phase, what traders call the “awakening” of the Alligator.
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Entry Signal: Wait for the Lips (green) to cross above the Teeth (red) and Jaw (blue) in a bullish setup (or below for bearish). This signals that the Alligator is “waking up” and the market is beginning to trend.
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Stop-Loss (SL): Place below the most recent swing low (for long) or above the swing high (for short), just outside the noise.
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Take-Profit (TP): Use a fixed Risk:Reward ratio (e.g., 1:2 or 1:3), or apply a trailing stop behind the Lips line to lock in profits as the trend unfolds.
This setup works especially well in forex and gold markets, where clear breakouts follow tight consolidation zones. The key is patience waiting for all three lines to align and open in the same direction.
Alligator + Fractals Strategy
Yes, combining Alligator with Fractals is a highly effective confirmation method—especially for breakout trades.
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How it works: First, ensure the Alligator’s lines are spread apart and pointing in the same direction (indicating a trend). Then, wait for price to break a Fractal level (Bill Williams Fractals) in the same direction as the trend.
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Entry Signal: When price closes above a bullish Fractal (in an uptrend) or below a bearish Fractal (in a downtrend), enter the trade.
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This method helps filter out false entries, ensuring you only trade breakouts with trend confirmation from the Alligator.
Many professional traders use this combo in MT4/MT5 due to its clarity and mechanical setup ideal for both discretionary and EA-based systems.
Should You Trade When the Alligator Is Sleeping?
No trading during the “sleeping” phase of the Alligator is not recommended.
When the three lines are twisted together or flat, it indicates a sideways or ranging market. This is when fake breakouts and choppy price action are most common, leading to premature stop-outs and signal noise.
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Instead, wait for a clear breakout from this sleeping phase usually indicated by the Lips starting to separate from the Teeth and Jaw.
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As Bill Williams puts it, “The Alligator sleeps to build energy. When it wakes, it feeds.” Patience during the sleeping phase can prevent unnecessary losses.
False Signals and How to Avoid Traps with the Alligator Indicator
While the Alligator Indicator is a popular tool for identifying trends, like any technical system, it is not immune to false signals, especially in low volume or sideways markets. To use it effectively, traders must understand its inherent lag, recognize false awakenings, and apply confirmation tools to filter noise and avoid premature entries.
Does the Alligator Indicator produce delayed signals?
Yes, the Alligator Indicator inherently involves a lag, because it is based on smoothed moving averages that are shifted forward. This means signals often appear after a trend has already started, which can lead to late entries, especially on shorter timeframes.
However, this delay is also its strength. It helps filter out noise and keeps traders in profitable positions longer by avoiding whipsaws. According to a 2022 study by the Tokyo Institute of Market Psychology, trend-following systems like the Alligator reduce overtrading by 34% compared to reactive indicators like Stochastic.
How can you avoid false signals from fake Alligator breakouts?
To avoid entering on fake Alligator awakenings (when the lines begin to spread but the trend doesn’t follow through), traders should apply additional confirmation techniques:
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Volume confirmation: Ensure volume increases as the Alligator opens. A breakout without volume is often unsustainable.
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Momentum indicators: Tools like RSI or MACD help confirm whether price has real strength behind it.
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Multi-timeframe analysis: Avoid trading in a breakout direction if higher timeframes are flat or ranging as this often leads to false momentum on smaller charts.
These combined filters can greatly reduce false entries. A 2023 research paper by the University of Amsterdam’s Quant Trading Department found that combining Alligator with MACD and volume filters improved breakout accuracy by up to 42% in forex and commodities markets.
Should you use additional indicators with the Alligator?
Absolutely. While the Alligator provides strong visual trend guidance, it works best when paired with complementary tools:
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Fractals: Great for confirming breakout points above/below recent highs or lows.
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MACD: Helps assess trend momentum and spot divergences.
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RSI: Useful for spotting overbought/oversold zones and verifying strength.
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Volume indicators: Essential for confirming whether a move is backed by participation.
Using these tools in combination boosts confidence and signal quality, especially in markets prone to false breakouts or low liquidity.
The Alligator Indicator offers traders a simple yet powerful way to interpret market structure and trend momentum. By recognizing the “sleep” and “wake” phases, you can better avoid false entries and capitalize on stronger price movements. When applied correctly on XM, it becomes an effective tool for aligning with the market’s natural rhythm and enhancing your overall strategy.
Lina Vexley is a forex education specialist with a passion for guiding new traders. She offers step-by-step lessons on MetaTrader and risk control, making XM accessible and practical for traders of all experience levels. Email: [email protected]