Bill Williams has offered this indicator, consisting of three balance lines, on the basis of the moving average (see Bill Williams' Chaos Theory on our web-site):
Alligator's Jaw (the blue line) — Balance Line for the time period, used for a chart construction (13-period moving average at the mid price (High+Low)/2, which is offset 8 bars into the future);
Alligator's Teeth (the red line) — Balance Line for the meaningful time period, which is a period lower (8-period moving average at the mid price (High+Low)/2, which is offset 5 bars into the future);
Alligator's Lips (the green line) — Balance Line for the meaningful time period, which is two periods lower (5-period moving average at the mid price (High+Low)/2, which is offset 3 bars into the future).
These lines are calculated at the mid price:
MEDIAN PRICE = (HIGH + LOW) / 2
With the help of the Alligator we can specify a trend or its absence on the market.
If all three lines are intertwined, the Alligator is asleep and the market is range-bound. The longer it sleeps, the hungrier it gets. When it wakes up from a long sleep it chases the price much farther, therefore price movements are much stronger. When the Alligator is asleep, stay square. Once the Alligator wakes up, it opens its mouth (Balance lines diverge) and starts hunting. Having eaten enough, it goes to sleep again (Balance Lines converge), so it's time to fix profits.
If the Alligator is not asleep, the market is either uptrending or downtrending:
- if the price is above the Alligator's mouth then it's an uptrend;
- if the price is below the Alligator's mouth then it's a downtrend.
