In order to correctly interpret and understand the alligator indicator, a forex trader should look closely into the signals. This skill has to be backed up with enough experience because proper reading is essential in coming up with a feasible strategy. First and foremost, one has to focus mainly on the baseline or the point of reference. This occurs just before the alligator wakes up. Consulting the graph, this is the point in which all the three colored lines coincide with one another. Knowing when the alligator will “eat” and when it becomes “full” are quite indicative of what should be done in the process of trading.
But one should know better that the alligator oscillator is not 100 percent accurate. Sometimes, it does not give the correct signals. Despite these circumstances, a forex trader who is backed up by experience will know how this should be interpreted and from there, he or she can do the appropriate actions. Again, the skill to interpret and the capability to come up with the correct game plan can be further enriched by constant exposure and wisdom that only experience can give.
In order for you to understand how the alligator oscillator works exactly, it might help to give an illustrative example. But remember that this discussion is done for purposes of educating readers and not to recommend or prescribe a single framework for trading. If you want to try this for yourself, it is highly recommended to use a forex demo or practice account so that you will not risk a single dollar in the process.
Now, let us have a sample trading system. This was intentionally made as simple as possible so that anyone can follow:
- Point out where your point of entry would be. This is the point where the lines of the alligator are joined or intertwined. If you are using a momentum indicator, this is the point in which the indicator for CCI signals a condition referred to as “overbrought.”
- Go on and proceed to “Buy” but limit this to only 2 to 3 percent of the total funds in your account to keep it at the safe level.
- The setting for stop loss should be adjusted to more or less 20 pips below the point of your entry.
- You should determine the point of exit to know when to stop the process of trading. This is when the alligator lines have crossed the candlesticks. This occurs when the CCI gives out a warning that the overbrought condition has already been reached.
Take note that of all the steps discussed here, the most risky are the second and the third step. Here, you should know how to manage your risk and you should apply the principles on money management that you have learned. At first, using the alligator oscillator might be quite difficult because it is not that easy to track three different smooth and colored lines while trading. But if you are consistent enough and you will do a lot of practice, in due time, you will see that all your effort to be familiar with the alligator technical analysis will pay off.