Indicators such as Alligator are quite often used by traders in their analysis before entering the market. The alligator itself is actually the development of the Moving Average which is then modified and adjusted so that it can follow the needs. The alligator consists of 3 lines commonly called claws, jaws and teeth as a metaphor of a true crocodile.
While the Relative Strength Index or RSI is an indicator that is similar to the Stochastic Oscillator where this indicator shows the level of price movements whether overbought or oversold. Just like another indicator from the oscillator type indicator group, RSI itself looks simpler than the others and it appears with only one line that is a pointer that moves in the range 0-100 in the indicator column.
How does entry trading use these two indicators?
We will see how the two indicators display on the MT4 screen.
Display of Alligator and RSI on the MT4 screen
As mentioned in the introduction above, the Alligator is an indicator with three lines that show the direction of the candlestick. In the picture above, you can see that the Alligator is a red, green and blue line that is always near the candlestick. The green line is jaws, the red line is teeth and the blue line is claws.
Meanwhile, RSI occupies a separate column below the main MT4 screen. The RSI is seen as a moving line in the range 0-100, where the important points are 30 and 70. The number 30 shows that the price of this currency pair has gone down too much so that it has the potential to be oversold. Meanwhile, numbers above 70 indicate that the value of this currency pair is already too high so it is potentially overbought.
Now, we see how entry is possible with these two indicators.
Example of Possible Entry
- In the picture, we see entries that go against the trend. The trend of the candlestick is down, seen in the Alligator which is also directed down. However, there is a potential for a reversal because the RSI touched the oversold area.
- The buy option is taken at that time, the target is a reversal of direction.
- When a reversal sign appears, exit the buy order and change to sell.
- It could also follow the trend, which is sell but it must be ensured RSI also follows it.
- If you follow the trend, make sure the RSI is in the overbought area near or more than 70 to reduce the possibility of floating loss for too long.
- Out of the market if there shows a change in trend, it can be seen from the Alligator who turned in the opposite direction.
- If the two indicators show contradictory signals, we should wait and not be in a hurry to enter and trade. Wait until the two are in the same direction and move together.
Some of the examples of entries above are the easiest to do and easy to analyze when using these two indicators. The RSI and Alligator indicators will complement each other wherein alligators tend to be late in predicting prices but are effective in seeing trends. Conversely, the RSI is quite effective in seeing the possibility of price movements but not good enough in seeing the possibility of future trends.
What about Stop Loss and Target Profit?
There are several approaches to determine Stop Loss (SL) and Target Profit (TP), including:
- By using a distance of pips, for example 30, 50 or 100 pips.
- By looking at the farthest possible movement of the candlestick from the average daily movement.
Taking into account the RSI, i.e. when the RSI touches the opposite area to what is happening right now.
- By looking at the Alligator, which is when the Alligator changes its jaws and claws position or when the candlestick tries to reverse the trend created by the Alligator.
The approach to calculate SL and TP is the easiest approach to do. Recommendations for SL and TP that are best for trading by using these two indicators are number 1 and number 2.
Keep in mind that the system using these two indicators does not always provide certainty of profit and success. Therefore the loss limit must remain and be installed at every time an entry is carried out in the form of SL. Indicators are only tools to see what is likely to happen, not tools to see the future that will happen.
Always obey the rules when making transactions, because most traders make the mistake of breaking the rules they made themselves. This rule includes not opening new positions if the existing ones are not yet closed regarding SL or TP. Do not get carried away quickly when experiencing losses or when making a profit. Keep doing the analysis with good and focused mind to achieve forex trading system that are yielding consistent profits.