Binary options are simple: taking trend with Alligator indicator

Any financial asset 70-80% of the trading day moves in the lateral ranges of different widths and only 20-30% of the time there are strong and directional movements, where you can make a good profit. But the main problem is determining the moment of the beginning of the trend because any technical indicator has a delay, which is impossible to completely get rid of. One of the solutions to this problem will be the Alligator indicator developed by Bill Williams, which brings stable binary options trading signals even in modern conditions of high-frequency (HFT) trading.

How the indicator works

Alligator is the main element of the complex trading strategy "Profitunity", and its main task is to determine the moments of flat, giving signals about the beginning and end of the current trend. From the point of view of strategy of binary options, we have a set of moving averages (Moving Average), shifted forward relative to the current price for a certain number of bars. Thus, you can use the indicator to predict the future movement in the medium and long term, but with speculative actions and increased volatility, the quality of signals falls sharply.

The graph shows three dynamic smoothed curves:

• SMMA(Median Price; 13; 8), "Alligators Jaw" - 13 periods, 8 bar forward offset, blue by default;

• SMMA (Median Price; 8; 5) or “Alligators Teeth” - red, 8 periods and 5 bar offset;

• SMMA (Median Price; 5; 3), Alligators Lips is the third 5-period average with a shift of 3 bars. The basic color is green.

All moving averages of the Alligator are balance lines with a “fair” price for several timeframes, without taking into account external (mostly fundamental) factors that move the market. The tool is included in the basic set of all popular trading platforms, such as MetaTrader. Williams recommends not changing the basic parameters for most assets, but the current Forex is much more volatile than when Alligator was created.  The indicator still requires configuration and thorough testing on the history

The type and periods of the Moving Average and the number of bars for the shift are similar to the Fibonacci series and due to this, a minimum delay is achieved. It is this feature that makes the indicator and its binary options trading unambiguous not allowing multiple interpretations of signals.

The type and periods of the Moving Average and the number of bars for the shift are similar to the Fibonacci series and due to this, a minimum delay is achieved. It is this feature that makes the indicator and its signals unambiguous not allowing multiple interpretations of signals.

Trading signal

The Alligator indicator is a classic strategy with breakout and reversal signals from each of the averages. There are three consecutive States (phases):

1. «Sleep»  Moving Averages move horizontally, are strongly intertwined and represent a narrow price range around the red MA without free binary options signals. The longer the flat lasts, the bigger the "hungry" indicator, the stronger and longer the new market movement.

2. "Awakening». The “fast” average Alligators Lips (green) is the first to respond to the increase in market activity, showing the most likely direction of a new trend. It is believed that you can open a deal already at the moment of its intersection by price, but it is better to wait and make sure the lines are in the right position relative to each other and increase the distance between them (the Alligator goes “hunting”).

3. "Hunting». Continued support for the current movement by new members and volumes, confirming the reaction of the red line Alligators Teeth, and the "slow" blue Alligators Jaw completes the formation of the figure.

4.«Sleep onset». When the trend ends, the lines begin to cross again and go horizontally (the indicator "sated"). It is recommended to close current binary options regardless of the current profit/loss level. During the whole trend, the lines of the Alligator indicator should be arranged in a strict order: green - red - blue. It is necessary to open after crossing the price of all three MAs, the entry on the rebound from Alligators Teeth only after the additional confirmation. In the final stage, the reverse intersection is observed, but again in the same order.

Let's go directly to Alligator's signals. The indicator gives the following entry points:

• CALL-option. Price breaks through all moving averages and closes above them. The lines are directed up and strictly in the order Alligators Lips (lower) <Alligators Teeth (middle) <Alligators Jaw (upper).

• PUT-option. Opposite conditions: the price breaks through the alligator indicator from top to bottom, the last 2-3 candles are closed below the intersection point. The averages are directed downwards in the order Alligators Jaw < Alligators Teeth < Alligators Lips.

The volatility range will be the distance between the green and blue lines, the angle of inclination can be used to estimate the strength of the trend. 

Alligator, an indicator for complex strategies

Depending on the trading goals and binary options strategy most comfortable for the trader, different Moving Averages for entering the market:

• Green for turbo options, allowing you to make a maximum profit;

• Red. Here, the average profit level may be lower than in the previous version, but the overall risk level (moderate trading) also decreases;

• Blue. Medium and long-term transactions, which may be accompanied by rather a deep drawdown’s, but at the same time, the Alligator makes it possible to stay on the trend for as long as possible.

The Alligator indicator does not give recommendations on the time of expiration, everything is determined individually; it is recommended to follow the rules:

• Expiration behind the Alligators Jawline makes the position more resistant to random and speculative price impulses, but increases the risk, since the price, when approaching the line, already transfers the transaction to a critical level of losses;

• Expiration in the fast average Alligators Lips often leads to quick closures on minor corrections and pullbacks after which the trend resumes, but without us;

Binary options guide recommends dividing the volume of the option into 3 equal parts: the expiration of the first part is behind the line of jaws of alligators, and the second is behind the teeth of alligators, completely closing the position when breaking alligator lips. This approach allows you to use the tool not only to profit from a short-term impulse but also as a signal of timely exit when it ends.

How to use with standard indicators

The basic principle of trading strategies is that the tools used must be from different groups and thus confirm each other's signals. So let's take the following combination in addition to the Alligator:

• Fractals indicator with default parameters;

• Simple (SMA) sliding average with a period of 233;

• Stochastic overbought/oversold oscillator (11.3.3). Parameters may change during periods of high volatility upward;

First of all, we do not open deals if the fractal is formed above or below the Alligator indicator – this indicates that the price has completely left the range of moving averages and the technical pullback is completed. We also stay out of the market when fractals are in the intertwining zone.

General trading rules:

• consider the expiration 2-3 points above / below the current price when the price for the second time after the rollback crossed the level of the last fractal;

• then you can move in the direction of the trend, opening additional options on new fractals; up only CALL, down only BUY;

• The use of a “long” SMA makes it possible to quickly determine a long-term trend: the price is higher - upward, lower - downward, moves horizontally - flat.

• Fractal signals are filtered out by Stochastic: lines down after a reversal at the level of 70/80 confirm PUT, CALL from 20/30 the purchase.

Let's summarize...

• As a trend determinant, the tool can be included in a strategy with any entry method. For example, you can open using in binary trading platform fast line, and take profit on the other two slow lines. Or close trades on opposite signals from other indicators, such as Awesome, MACD or the Stochastic discussed above;

• You can combine the Elliott Wave Theory and the Alligator indicator. How to use: if the price has gone abroad Alligators Jawan impulse wave is formed, moves inside this zone - corrective;

• The main drawback is Williams' decision to use moving averages, which are the most lagging technical tool, although in his time the markets were less mobile, and such a decision is justified. But if the signals are confirmed by oscillators on the older timeframes from H1 and above, the Alligator indicator allows you to confidently take at least 60-70% of any trend.