The Alligator Oscillator in an Alligator Trading System is going to be backtested.

Bill Williams’ Alligator Oscillator is a default indicator in your trading platform, but many do not know what it does and how it is supposed to be sued.  The name has teeth to it and it is certainly memorable, but is it just another Oscillator in a line of them.  It is rare for Alligator Forex Trading Strategies that use the Gator Oscillator in isolation, in fact, most use it as a complementary indicator.  However, in this article it will be used in isolation with basic candlesticks.

But before we test through systems…

What is Bill Williams’ Alligator Oscillator?

The most popular Oscillator of Gainesville, Florida is not to be confused with the Alligator Indicator.  This Alligator Oscillator is called the Gator Oscillator in MetaTrader 4.  In MQL4 language, one would call the Alligator Oscillator by using the iGator Function.

The Alligator Oscillator is actually related to the Alligator Indicator that overlays on the chart.  This Oscillator is a histogram that appears typically in a window below the main chart.

How it works is that there are two histograms that measure the convergence and divergence of the Smoothed Moving Averages associated with the Alligator Indicator.  The Alligator Indicator has three Smoothed Moving Averages in it with three corresponding colors (Red, Blue, Green).

• The Blue Line is a 13 period Smoothed Moving Average that is carried over 8 periods into the future.
• The Red Line is an 8 period Smoothed Moving Average that is carried over 5 periods into the future.
• The Green Line is a 5 period Smoothed Moving Average that is carried over 3 periods into the future.

What the Alligator Oscillator (Gator Oscillator) does with these lines is create a dual histogram of the divergences.  A top line and bottom line histogram of absolute differences between the Blue and Red Lines and the Red and Green Lines respectively.

Below is how it is visualized without captions:

With explanatory captions below:

The negative and positive numbers on the chart only signify location the bar on the chart, not necessarily the value.  The red and green lines signify whether the value is less than or greater than the previous bar’s value.

The thought process with the Gator Oscillator is that the Oscillator is like an alligator lurking in the Everglades.

• Sleeps – Both bars are red
• Eats – Both bars are green
• Wakes Up –  After sleeping, one bar is green and one bar is red
• Gets Full – After eating, one of the bars is red

This is an indicator that measures volatility quite well as the further the distance the histogram bars are from the zero line, the greater the volatility that exists for the particular currency pair.

So we have the theory behind the Alligator Oscillator, but how does it actually work in an actual strategy?

Testing a Gator Oscillator Trading Strategy in Isolation

The strategy in this backtest of the Alligator Oscillator is very simple.  Keep in mind that on its own, it does not point to a particular market direction and a bullish or bearish position.  There needs to be something accompanying this indicator much like volatility indicators.

The Rules:

• Timeframe:  1 Hour, 4 Hour
• Currency Pairs:  EURUSD, USDJPY

Buy Entry:

• A Bullish Engulfing Candle Pattern or Bullish Harami presents itself
• Two Candles Previous, the Gator Wakes Up
• Previous Candle, the Gator Eats

Sell Entry:

• A Bearish Engulfing Candle Pattern or Bearish Harami presents itself
• Two Candles Previous, the Gator Wakes Up
• Previous Candle, the Gator Eats

Exit When:

• After eating, one of the histogram bars turns red and the Gator is Full.

EURUSD – 1 Hour

EURUSD – 4 Hour

USDJPY – 1 Hour

USDJPY – 4 Hour

The Gator Oscillator fares better on a longer timeframe and it is rather obvious here.  The main issue is that there were simply not enough trades placed, but they did fare much better than the 1 Hour timeframe during the same test period.  The Alligator Oscillator when used in conjunction with other indicators or price action elements can yield positive results on a 4 Hour Chart.  Investors and traders may not have the patience for a Daily Chart and a 1 Hour Chart is far too random for this Oscillator.

Do some exploring yourself and this article will be updated to reflect other approaches with the Alligator Oscillator, the derivative of the Alligator Indicator.

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