On the chart above for Light-Crude-Oil-Futures I highlighted "ever so slight" buy signals (Fractals) on a two hour chart. This is for short-term traders.
The Alligator: How it works. The Alligator is a collection of three moving averages , which are called the Lips, the Teeth and the Jaw and colored blue, golden, and black.
The idea of the trading strategy is to catch those trending movements that occur in zig-zag fashion for less than a week, sometime just hours. Such moments can be identified by looking at the Alligator Lines. Usually, before a trading move happens, the price moves in a tight range and intertwines with the Alligator Lines. This is called a "sleeping alligator" because it is so quiet. Then it explodes into a trading move. The price starts moving away from the Alligator, and the Alligator Lines are opening. This phase is dubbed the "hungry alligator" because it looks like an alligator wakes up from sleep and opens its mouth (distance between the lines) to chase the little fish (price bar) for breakfast.
The Three Wise Men-Now onto the entry rules. In order to understand them, you must have the following indicators on your charts: 1. Alligator (as described above). This is wise man number one. 2. Awesome Oscillator (phase energy, lower indicator above the chart). This is wise man number two. 3. Fractals (up and down arrows). This is the third wise man.
Awesome Oscillator Definition and Facts:
1. The difference between a 5-period and 34-period median price moving average , which is actually the 5-34 MACD histogram.(Simple moving average better than EMA )
2. Bars that are higher than the previous one are painted green, otherwise painted red.
Entry and Exit (long):
1. Ideally it is preceded by a bullish divergence bar, or a-morningstar candlestick or else must be preceded by a down fractal.
2. Buy when the AO (phase energy bars) shows three consecutive green bars.
3. Stop begins at the bottom the bullish divergence bar or down fractal, then gradually trail up to the latest 3-5 bars low, or when a bearish divergence bar appears.
4. Opposite for short entry.
Comments: The AO is more than just a provider of entry signals. The best use of it is to point out divergence in a trend. The divergence is the difference between price and momentum direction. For example, when a trend is showing higher highs, but the bars in the AO have lower highs, this is a case of divergence, and usually an end of trend will follow soon.
The Third Wise Man: The Fractal. 1. An up fractal is a high of a bar preceded by 2 lower highs and followed by 2 lower highs. 2. Signal of an up fractal is only valid if it is above the Alligator lines. 3. Vice versa for a down fractal.
Entry and Exit (long): 1. Buy on breakout of a valid up fractal (above Alligator).
2. Stop begins at the bottom of the bullish divergence bar or down fractal, then gradually trail up to the latest 3-5 bars low, or when a bearish divergence bar appears. 3. Opposite for short entry.
Comments: The fractal is actually a breakout strategy on previous high or low. According to Bill Williams, each fractal is an end of an Elliot Wave , and a breakthrough of each fractal marks a new impulsive wave, so that we are able to trade that wave even without knowing what wave we are in.
Unfortunately - I am running out of room for this entry. On the chart above for-Light-Crude, the MEST-positives are an up Fractal, FOUR green up bars for phase energy (AO),a 2nd buy Fractal, and the alligator is feeding slightly in the uptrend. Other trading positives, the Ichimoku Cloud is rising and momentum is rising. My advice, pay attention to-MEST (momentum, energy, space, time). The object is ALWAYS the following five words: MOVE WHEN THE MARKET MOVES. If you do, over time, your wins will be bigger, your losses smaller (because you sell when the Fractals and phase energy tells you).
Good luck to you in all your trades. Don.