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Wake up to the Market Trend with the Gator Oscillator

Gator Oscillator

The Gator Oscillator is one of several well-known indicators developed by a celebrated trader and analyst Bill Williams. It is intended to make it easier for you to recognise when a market is trending or when it is range-bound. As such, it makes a useful aid in the timing of your trades. Its ideas expand on those first introduced for one of Williams' other developments – the Alligator Indicator.

In fact, the Gator Oscillator is designed to work in conjunction with the Alligator Indicator, as a kind of supplementary tool. It's probably a good idea, then, to quickly recap the three balance lines plotted by that indicator. These are simple moving averages (SMAs) calculated over various time frames for values of the median price (that is, H+L/2). They are calculated as follows:

  1. Blue Alligator's jaw = 13-period SMA shifted 8 bars forward
  2. Red Alligator teeth = 9-period SMA shifted 5 bars forward
  3. Green Alligator lips = 5-period SMA shifted 3 bars forward

As we shall see below, we can actually set these periods and shifts to custom values of our own choosing in MetaTrader 4, but the classic values are as shown above.

The Gator Oscillator formula uses these balance lines to derive values for a dual histogram — the indicator plots two histograms either side of a zero line. While the Alligator Indicator plots its balance lines directly on to a price chart, the Gator Oscillator instead shows the dual histogram separately beneath the price chart.

The positive values are the absolute difference between the Alligator's jaws and teeth (that is, the blue and red lines). The negative values are calculated as the absolute difference between the teeth and lips (that is, the red and green lines) and then given a negative value, so as to lie entirely below the zero line.

When a bar in the histogram is of a greater magnitude than the previous bar, it is coloured green. When its magnitude is smaller than the previous bar, it's coloured red. The bars of the Gator Oscillator are intended to make it even easier to recognise different market states than with the Alligator Indicator. They also serve to confirm what the Alligator Indicator is showing. We'll discuss how this works a bit further down when we look at trading strategies with the Gator Oscillator.

Using the Gator Indicator in MetaTrader 4

In MetaTrader 4, the Gator Oscillator comes ready-installed as one of the indicators provided as standard. MT4 has a dedicated folder in its Navigator for Bill Williams indicators as you can see in the image below:

USDJPYH1-Gator settings

This means you don't have to make a separate Gator indicator download; as soon as you install MetaTrader 4 on your device, you will have access to the Gator Oscillator.

When you launch the Gator Oscillator in MT4, you have the option to set the period values for the jaws, teeth, and lips, as well as the associated shifts. As you can see from the image above, the default values are already pre-populated at the levels originally recommended by Bill Williams. If you want to go ahead with the default values, simply click OK.

You can, of course, configure these parameters to whichever values you see fit, and as you become more experienced, you might want to experiment with them. When first using the Gator Oscillator, however, it is eminently sensible to use the default values as your starting point.

The image below shows what it looked like when I added the Gator Oscillator to a Forex chart of USD/JPY:

Gator Oscillator on a USD/JPY Forex chart

You can see the histogram for the Gator Oscillator plotted as two histograms beneath the main chart. For any one price bar, we have a positive value for the Gator Oscillator above the zero line, and a negative value below the zero line.

But how do we actually use this to help us trade?

The Gator Oscillator Trading Strategy

The Gator Oscillator trading strategy ties in closely with that used for the Alligator Indicator. Bill Williams designed the the Alligator Indicator to be an integrated approach for trading trending markets. It describes when the market is sleeping (range bound), awakening (starting to form a trend) or feeding (continuing to trend).

The Gator Oscillator expands on this and describes the four following states:

  1. Dormant, or sleeping – absence of a trend in the market;
  2. Awakening – formation of trend;
  3. Eating – continuation or persistence of the trend;
  4. Sated – a warning that the trend may be approaching its end.

The Gator Indicator suggests a dormant or sleeping phase when we see both bars either side of the zero line being red. In the Alligator Indicator, this corresponds to when you see the jaw, teeth, and lips are closed, closing or intertwined. When the Gator is sleeping like this, you should stay out of the market; the indicator is intended for trading only when the market is trending. A dormant, range-bound market, Bill Williams contended, was when you should sit on the sidelines and wait.

The awakening phase is indicated by different colours on either side of the zero line at the same time. This corresponds to the mouth widening in the Alligator Indicator. When the Gator has awoken after sleeping, it is hungry, and this is a time when you should be looking to enter the market.

When the indicator shows green bars either side of the zero line, it suggests the eating phase. When you see this, the trend is likely to be accelerating, and you should try to run your profits.

If we see a solitary red bar crop up after we have been in an eating phase, this is a sign of a sated phase. The trend is close to running out of steam, and you should take action to exit your position as favourably as you can.

When bars both above and below the zero line go red, the Gator has gone back to sleep, and the trend is over. You should once again be out of the market and now have to await the start of a new trend.

No indicator is perfect, or even close to perfect. You've probably noted that the trading strategy above is all about timing, and doesn't give you direction. Being a trending tool, you will naturally want to be trading in the direction of the forming trend when the Gator awakens. Now, this may be apparent from simply looking at price action on the chart, but if not, you will need another indicator to aid you. This is a generally wise idea anyway as pairing up an indicator with another can often help improve their effectiveness. The Gator Oscillator was intended to be used with the Alligator Indicator, so that is a natural choice. The Alligator Indicator will help indicate direction, but there is no reason you can't experiment with other indicator combinations to see what works best for you.

Although MetaTrader 4 comes bundled with a number indicators as standard, you might be interested in obtaining a more comprehensive selection of trading tools. If so, you should consider installing MetaTrader 4 Supreme Edition. MT4SE is a custom plug-in designed by industry professionals to allow you to enjoy the ultimate trading experience. It offers additional indicators as well as a variety of other cutting-edge tools.

Download MT4 Supreme Edition - Forex trading platform

The best way to try all these combinations out is with a Demo Trading Account. This allows you to see how your trading strategies play out with live market prices, but keeping all your practice trades risk-free. This means you can determine for yourself what is most likely to succeed, without risking any money.

The Gator Oscillator Indicator in Summary

The Gator Oscillator uses the convergence and divergence of the three balance lines from the Alligator Indicator to help you identify new trends. It also aids interpretation of how such trends are progressing and when they might be coming to an end.

You should bear in mind that the balance lines used to represent the jaws, lips, and teeth of the Alligator Indicator, from which we derive the Gator Oscillator, are moving averages. As such, there is inherently some lag involved in the signals provided. The Gator Oscillator, nevertheless, can be useful for distinguishing when to trade or when to be patient and sit out until a better trading opportunity arises. It's most effective for trading strongly directional markets as this is the condition for which Bill Williams intended it to be used.

We hope you've found this to be a useful introduction to the Gator Oscillator, and we wish you the best of success in your trading going forward!