The Best Strategy to Define Entry Points: Three Wise Men and the Alligator

The Three Wise Men and the Alligator strategy is a trading technique created by Bill Williams, a well-known trader and author of “Trading Chaos.” This strategy aims to capture and profit from market trends by entering trades at the start of significant movements. It combines the Alligator indicator with three specific market signals known as the Three Wise Men to determine the best entry and exit points.

What can you trade with it?

This strategy can be applied to various financial markets, including stocks, Forex, commodities, and indices. It is versatile and can be used in any market where trends and momentum play a significant role.

On what timeframes?

The strategy can be adapted to different timeframes depending on the trader’s preference and trading style. It can be used on anything from short-term charts (like 5-minute or 15-minute charts) for day trading to longer-term charts (like daily or weekly charts) for swing trading. The key is to find a timeframe that matches your trading objectives and risk tolerance.

Indicators

The Three Wise Men and the Alligator strategy requires some simple price action analysis and three indicators, all available on MetaTrader. The indicators are:

• Alligator Indicator (13, 8, and 5-period MAs, called “Jaws”, “Teeth” and “Lips”)
• Awesome Oscillator
• Fractals

All of them can be found in the Indicators tab, in the Bill Williams section. Leave all settings as they are.

How to use the Three Wise Men and the Alligator strategy?

1. Alligator Indicator

The first step this strategy needs is provided by the Alligator indicator, which helps identify the market’s trend. This indicator can only have two phases: 

• ‘Sleeping’ Alligator (do not trade). When the Moving Averages converge (are very close to one another), it signals a “sleeping alligator,” indicating a period of low volatility and no clear trend. 
• ‘Hungry’ Alligator (trading opportunity). When the lines start to diverge, the alligator is said to be “hungry,” signaling the start of a new trend. Exactly when the alligator starts to feel “hungry”, or has been wanting to eat for a while, it’s time to prepare for a potential trade.

In order to obtain proof of a potential trade entry, this strategy uses a 3-step confirmation, each of which is referred to as a “Wise Man”.

2. First Wise Man – divergent bar

The first entry signal comes from the formation of a divergent bar, which indicates a potential market reversal. 

A bullish divergent bar occurs when a bar has a lower low than the previous one but closes in the upper half of its range. This suggests a shift from bearish to bullish sentiment. A bearish divergent bar is the opposite, signaling a potential sell opportunity.

This signal should appear after the price has been rejected by Alligator’s lines to confirm the start of a new trend.

3. Second Wise Man – Awesome Oscillator (AO)

The Awesome Oscillator is used to confirm the First Wise Man’s signal. When three consecutive bars of the AO align with the direction of the First Wise Man (green bars for a buy signal or red bars for a sell signal), it confirms the trend’s strength.

This indicator helps traders add to their position, reinforcing their initial trade decision and giving confidence in their already opened trade.

4. Third Wise Man – fractals

Fractals identify breakouts by marking previous highs or lows. An up fractal signals a ‘buy’ opportunity, while a down fractal signals a ‘sell’ opportunity.

The perfect scenario is when all Three Wise Men align in the same direction, providing a strong signal for entering the market. This is called a ‘Profitunity Signal’.

5. Position management

• Take-Profit. The TP level can be placed near the recent high or low (for a ‘long’ and ‘short’ position respectively) or targeting at least a 1.5 Risk/Reward ratio.
• Stop-Loss. The SL must be placed at the extreme opposite end (lowest low for a buy trade, highest high for a sell trade).
• Early exit. When an opposite signal appears, such as a reversal pattern, or when three consecutive bars on the AO histogram indicate a potential trend reversal, the position can be closed before it reaches its profit objective.

This strategy can help traders effectively capture and ride trends while minimizing the risk of false signals.

A real example of the Three Wise Men and the Alligator strategy

By following the strategy’s trading algorithm, a trader can profit a lot. Let’s take a look at a real example of its usefulness.

On this USDJPY H4 chart, we see a bullish divergence form, after a clear rejection from the ‘Alligator’ indicator. As a result, we could have opened a position as soon as that happened, or we could have waited for confirmation from the Awesome Oscillator.

When 3 consecutive bullish bars appeared just after the divergence, the position was sure to be opened, riding the trend up until a reversal of 3 red bars on the AO appeared.

For the sell side, after the Alligator went to sleep for a while, it yet again became hungry, diverging its 3 MAs. Right at that moment a bearish divergence appeared, rejecting from the Alligators’ lips, teeth, and jaws.

If we want to wait for a confirmation, the AO furnished one just in time, marking 3 red bars — aligned in the first Wise Man’s direction.

Fractals showed an arrow in the direction of the main trend, signaling a ‘Profitunity Signal’ for both the long and short scenarios.

By trading the Three Wise Men and the Alligator strategy on this and many other pairs you can rest assured that trends will escape you no longer.

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