What it means
The Alligator indicator uses three smoothed moving averages of a market's median price, which is the midpoint between the high and low of each bar. They are called the jaw, the teeth and the lips, and each is based on a different number of bars and shifted forward on the chart.
When the three lines are tangled together, the market is considered to be sleeping, and when they fan out, it is considered to be hunting a trend. The Gator Oscillator turns that picture into a histogram.
The upper bars measure the distance between the jaw and the teeth, and the lower bars measure the distance between the teeth and the lips, drawn below the zero line as negative numbers. Bars are usually coloured green when they are larger than the previous bar and red when they are smaller.
Traders read the histogram as a guide to the market's phase. Small, flat bars suggest the lines are close together and the market is ranging, which is a poor time to follow trends.
Growing green bars on both sides suggest a trend is being established, and shrinking red bars suggest it is running out of steam. Like most technical tools, it is used alongside other information rather than alone.
A trader might combine it with price patterns, volume and the broader news background before acting. It does not forecast price direction on its own, only the strength and activity of the movement.
The nuance is that the indicator lags, because it is built from moving averages, and settings can be changed. Different traders and platforms use slightly different smoothing methods, so results can differ, and signals tend to be late in fast, choppy markets.
It is best treated as a filter for deciding whether to trade, not a prediction of where prices will go.
In practice
Real-world examples.
Example
A currency trader sees the Gator bars shrink to almost nothing after a long rally. She takes this as a sign that the trend has stalled, and she moves to the sidelines until the bars grow again. She avoids a series of small losses in a quiet market.
Example
A commodity analyst notices both sides of the histogram turning green and growing after a breakout in oil prices. He treats this as support for the idea that a new trend has begun, and he sizes a position accordingly. He sets a stop loss in case the move fades.
Example
A student of technical analysis compares the Gator Oscillator on a stock chart with the underlying Alligator lines. She sees that when the lines are intertwined, the histogram is nearly flat. She writes a short note explaining that the two tools show the same information in different forms.
Formula
Calculation
Upper histogram = |Jaw - Teeth|
Lower histogram = - |Teeth - Lips|
Suppose that on one bar the Jaw is 105.0, the Teeth are 103.5 and the Lips are 102.0. Upper histogram = |105.0 - 103.5| = 1.5. Lower histogram = - |103.5 - 102.0| = -1.5. On the next bar, the Jaw is 105.2 and the Teeth are 103.4, so the upper bar = |105.2 - 103.4| = 1.8, which is larger than 1.5 and would be drawn green, showing that the lines are spreading apart.Case study
Seen in the real world.
Marlin Point Capital is an illustrative, fictional trading firm that used trend-following strategies on stock index futures. Its traders noticed that many of their losses came during quiet periods when prices drifted sideways.
The head of trading added the Gator Oscillator as a filter. The rule was simple: new trend trades were allowed only when the histogram bars had been growing for at least three consecutive bars.
In the illustrative six-month review, the number of trades fell and the average loss per trade shrank, while the larger trend trades were kept. The head of trading cautioned that the sample was small and that the filter might not work equally well in every market.
Watch out
Common mistakes.
- Using the Gator Oscillator to predict the direction of price, when it shows only the strength and convergence of the underlying moving averages.
- Ignoring that it lags the market, so signals can arrive after a good part of a move has already happened.
- Relying on it alone, without checking price action, volume and the wider market conditions.
Questions
People also ask.
What does the Gator Oscillator measure?
It measures how far apart the Alligator's jaw, teeth and lips are, which indicates whether the market is trending or ranging.
What do the green and red bars mean?
Green usually means a bar is larger than the previous one, showing the lines are spreading apart, and red means it is smaller, showing they are moving together.
Who created it?
It was developed by Bill Williams, who also created the Alligator indicator and other trading tools.
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