As I have mentioned in previous participations, in trading technical analysis is of vital importance, mainly because it uses elements of the scientific method to record a real history of the movements of the price action or of a given market, and then uses that data to create graphs that serve to evaluate and extrapolate the current trends that a given financial market is developing.
Basically, technical analysis is based on the statistical values that develop the price action to create trends, ie it is based on a balance between supply and demand, in this sense I have to point out that among the statistical indicators that can be used within the technical analysis to know the current trends is the Alligator Indicator.
The Alligator Indicator is a technical instrument, whose statistical configuration allows to confirm current trends, it also serves to filter between good and bad signals, therefore, the purpose of this publication is to describe in detail the Alligator Indicator.
The Alligator indicator is a technical analysis tool that allows trend following by using three moving averages: the first 13-period moving average (alligator jaw), the second 8-period moving average (alligator teeth), and the third 5-period moving average (alligator lips).
An element to highlight of the Alligator indicator is that it allows the identification of counter-trend movements, because it applies convergence/divergence relationships to build more reliable signals, by building slower turns with the jaw, and faster turns with the lips, thus filtering good and bad signals, an element of great relevance to apply in any trading strategy.
At the graphic level, the three moving averages of the Alligator indicator are structured in three lines, as explained below:
A first Blue colored line corresponding to the 13-period slow moving average adjusted for the last 8 periods.
The second line in Red which corresponds to the moving average over 8 periods with adjustment in the last 5 periods.
And a third green line that corresponds to a fast moving average over 5 periods with adjustment in the last 3 periods.
Visually, the three lines provided by the Alligator indicator help us to identify when there is no trend in a given market, and also help us to understand when the trend is forming and in which direction it is forming, an action of utmost importance to fine-tune buy/sell strategies and take a good position in the market.
In the next post I will expand on other technical aspects of this interesting indicator.
SOURCES CONSULTED
ForexTraders The alligator strategy – how to use the Alligator in forex trading. Link
OBSERVATION:
The cover image was designed by the author: @lupafilotaxia, incorporating image: TradingView
