Alligator is an indicator that is quite often used by traders. The alligator itself is actually similar to a mixture of Bollinger Bands and Moving Average which is then formulated into a new indicator. The alligator, as is well known, has three main lines called claws, teeth and jaws. These lines are guideline for traders to do trading analysis.
Meanwhile, Stochastic Oscillator (SO) is one of the popular indicators among traders and quite widely used to see the potential strength of a price. SO itself is a line that moves up and down between the index 0-100 which is the value of the average candlestick movement. Figures below 30 indicate that the current price is too cheap aka oversold and if the SO line is above 70 indicates that the price is too expensive or overbought. Simply put, SO is an indicator that predicts that prices will likely reverse direction.
How to trade using both indicators?
Let’s see how these two indicators look when juxtaposed together on the chart.
Display of Alligator and Stochastic Oscillator Indicators on the MT4 Chart
As you can see, the Alligator is on the main screen and is always in contact with the candlestick, while the SO occupies a separate column outside the main screen. Alligators represented by green, red and blue lines which are indicators that can indicate whether the trend is currently bullish (up) or bearish (down).
Whereas SO shows that the price movement of this currency pair is too expensive or too cheap. Lines in the SO column that go up and down are the main indications of price determination will turn around or there is still potential to continue in the direction of the trend.
Now, we will see an example of an entry using these two indicators.
Example of Entry Trading Using the Alligator and Stochastic Oscillator Indicators
As seen in the picture, the Alligator shows the downward direction, aka bearish for the currency pair. So, if we follow this trend then entry should also follow the trend that is sell.
- Note that sell confirmation can be done with the help of an SO where every time the SO enters the overbought area (the SO line above) then that is an opportunity for a sell entry.
- As seen there are 3 potential sell orders that can be done as long as the downtrend still continues. Use the opportunity to make an entry.
- If you want to take action against a trend or counter trend, we must first make sure that the two indicators are not opposed to each other.
- If you want to trade against a trend like the picture above, you have to be careful. When SO is seen in an oversold zone, the strength to go up looks not so strong and it’s easier to go down.
- It is better to wait while the Alligator convoluted, indicating that sideways are happening more suitable for trading against the trend. However, both trading following the trend and against the trend, traders should remain cautious.
What about Stop Loss and Target Profit?
For trading systems using these two indicators, Stop Loss (SL) can be adjusted using the number of pips approach based on daily moving averages. If in a day the average moves 100 pips, then we can set SL at 100 pips from the opening price. or if it’s too far, half of daily movements.
We can also adjust SL by installing it in the opposite direction to the Alligator or SO. For example from the previous picture, we can attach SL from sell sell above the blue line of the Alligator or if a candlestick appears that shows a reversal of direction, or when the Alligator changes direction.
As for the Target Profit (TP) we can take it when the SO reaches the oversold point below, or when the candlestick begins to approach the green line of the Alligator. TP is easier to determine especially when using these two indicators.
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.