There is a popular trading expression - "the trend is your friend." Every trader in the world knows that following the trend is the most substantial way to profit from such an uncertain market as Forex. In the previous articles, we have already introduced to you some effective trend-trading methods like the Guppy, the Double Stochastic, and how to use them to grab trading signals. Today, we want to recommend you another trending system, based on the famous indicator - Williams Alligator.
First, let’s talk about the “Williams Alligator”. This is a special trend-seeking indicator developed by the legendary trader Bill Williams, an early pioneer of market psychology. It is composed of three smoothed moving averages (SMMA) which have separate time periods, presenting the long-term, mid-term and short-term performance of traders. When the asset prices stay above the triple SMMAs, a bullish trend is valid. Conversely, a bearish trend is confirmed when the asset prices trade below these triplets. The default setting of the Alligator is 13, 8, 5 that is very sensitive to price action and could generate unreliable signals, therefore, you should change it to 26, 14, 6 to make this indicator more stable.
In any case, using only one indicator to trade doesn’t guarantee for a long-term trading benefit. That’s why the system we are discussing is combined with two indicators – the above-mentioned Alligator, and a Relative Strength Index (RSI) with the standard setup (14). By using one leading technique along with one lagging, we can track out more reliable trends and trading opportunities.
This system shows a win-rate of about 75% after being carefully tested by us over 100 signals.
How to use the Alligator & RSI to trade Forex
5-minute, 15-minute, and 1-hour are the charts that this strategy works best on. After installing the required indicators, we have to observe the performance of both the Alligator and the RSI.
In an uptrend, when prices retrace and approach the nearest-term SMMA but tend to rebound, and the RSI line is above 60, we can enter the market with a buying position. On the contrary, when prices rally in a downtrend and hit the nearest-term SMMA but tend to rebound, and the RSI line is below 40, a selling signal is valid.
The stop-loss could be set in the middle of the mid-term and long-term SMMAs. After five or six candles counted from the position’s opening time close, we can exit the order.
There are some entering rules you should note as follows:
- In an uptrend, we only seek for bullish signals, and vice versa with a downtrend.
- When asset’s RSI is above 85, it indicates that the uptrend becomes invalid. Conversely, when asset’s RSI is below 15, the downtrend is considered over.
- Too much crossover between the SMMAs suggests that market condition is unobvious, and you should avoid trading in this period.
Pros and cons of the system
- Generating more accurate signals
- Enabling us to profit from scalping
- Requiring us to constantly observe the charts
Forex markets are volatile, requiring us to have a reliable strategy with strict checking rules. The system combined of the Alligator and the RSI is quite effective in filtering false signals, helping us avoid losing streaks. Besides hoping you will enjoy the system, we also kindly repeat that there is no 100% winning strategy, no matter how well it’s developed. To profit from Forex markets in long-term, please always remember to minimize your losses by applying risk controlling and psychological managing methods.