When Bill Willams developed the Alligator indicator, the rational behind this was the fact that the market trend only 15-30% of the time and stays range bound for the majority of the time. Hence, he wanted to develop the Alligator to indicate when the market is definitely trending, in order to capture the bulk of the new trend.
In binary options, we do not need to make profit by riding the trend, but knowing if the market is trending or not certainly helps.
The Alligator’s Teeth Touch strategy is very similar to the Trend Line Touch strategy we discussed last week. However, instead of using a single trend line, with Aligator’s Teeth, we are going to use three different moving averages in order to accurately identify if the market is trending or not.
Prepare the Chart for Alligator’s Teeth Strategy
If your binary options broker offers MetaTrader 4, then you are in luck because the Alligator indicator is offered for free as a built-in technical indicator in this platform.
However, if you are trading with some other platform, please add moving moving averages:
- A 13-period Smoothed Moving Average, with shift 8 – Called the Jaw
- A 8-period Smoothed Moving Average, with shift 5 – Called the Teeth
- A 5-period Smoothed Moving Average, with shift 3 – Called the Lips
How to Trade the Alligator’s Teeth Strategy?
At first glance, it may look complicated, but it is not. With the three moving averages, we are basically looking for a a trending market.
When the Lip is above the Teeth, and the Teeth are above the Jaw, it would indicate an uptrend. By contrast, when the Lip is below the Teeth, and the Teeth are below the Jaw, it would indicate a downtrend.
During an uptrend, you should wait for the price to come back down to the Teeth and touch it. Once the price penetrates below the low of the bar that touched the Teeth, you should immediately place a PUT order.
Similarly, during a downtrend, you should wait for the price to come back up to the Teeth and touch it. Once the price penetrates above the high of the bar that touched the Teeth, you should immediately place a CALL order.
One of the best things about the Alligator’s Teeth Strategy is the freedom to trade any timeframe with it. You can trade the 5 minute chart or the daily chart, it has almost the same accuracy level. However, as always, we strongly recommend that you trade with this strategy during a time when the market is active and there is a higher chance of a trend. Hence, it works best during the time when London and New York markets are open.
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