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THEALLIGATOR

OURCOMPASSANDODDSMAKER

Oneofthekeystoprofitabletradingistotakeonlythosetradeswiththemostpotentialandstayoutof
situationswherethereismarginalpotential.Mytradinggrouphascompletedfifteenyearsofintensive
researchintoapplyingthenewScienceofChaos,alongwithquantumphysics,holography,cybernetics,
nonlineardynamics,informationtheory,andfractalgeometry,totheworldofstockandcommodity
trading.Whenthisresearchstarted,wewereusingsupercomputers.Throughaprocessofliterally
millionsofiterations,wedevisedaprocessthatwillworkonordinarypersonalcomputers.TheAlligator
is basically a compass to keep you trading in the appropriate direction no matter which way the
immediatepriceismoving.TheAlligatorisapersonificationofthisprocessandinfluenceseverysignal
inmytradinggroup'sarsenal.Wewilldemonstrateboththesetupandhowtousethisvaluabletool
whiletrading.Inthischapter,wewilldescribetheAlligator,whatitdoes,howtoconstructit,andhow
totradeit.
TRADERS'BI6GESTPROBLEM
Tradingislikelythemostexcitingwaytomakealivingand/oraccumulateafortune.Youareyourown
bossandyourownworstenemy.Youalonemustdealwiththefrustrationofyourownchoices.Ifyou
lose,thereisnooneelsetoblame.Youmadethelosingdecision,evenifthatdecisionwastolet
someoneelsemakeyourdecisionsortofollowsomeoneelse'sapproach.Ontheotherhand,ifyouwin,
youdon'thavetosay"Thankyou"toanyone.Youarenotobligedtoanyonebutyourself.Thereisno
politicsnoranyonetowhomyoumustcater.Youaretruly"slidingdowntherazorbladeoflife."But
hereistheproblem.Mostofthetime,themarketgoesnowhere.Only15to30percentofthetimedoes
themarkettrend,andtraderswhoarenotonthefloormakenearlyalloftheirprofitsinatrending
market.Mygrandfatherusedtosay,"Evenablindchickenwillfindanearofcorneverynowandthen."
Wecalltrendingtrades"blindchickentrades"becauseallyouhavetodois"bethere."Throughthe
years,wehavedevelopedanindicatorthathelpskeepourpowderdryuntilwecangetintooneofthose
"blind chicken trades." Figure 31 shows typical "generic" market action in both stocks and
commodities.Thetypicalmarketspendsfrom70to86percentofitslifegoingnowhere.Inthatportion
ofmarketaction,mosttraderslose.Abouttheonlyonesmakingprofitinthosetimesaretradersonthe
floorandspecialistsinthestockmarkets.ThemostcrucialpointinFigure31isatthelastlowpoint,
justbeforethelargemoveupward.
Anintegratedap~roachtomonitoringthemarket'smomentum
~gimpleindicatortotradeonl~withthecurrenttrend
Aprotectiondevicetonotlosemoneyduringbracketed
Figure32WhatistheALLigator?
TheProfitunitytechniques,includingthefivemagicbullets,arethebestyetinfindingthisideal
startingpointfortrading.Hereisourproblem:wedon'twanttospendourtimeenteringandexitinga
marketthatisgoingnowhere.Ifthemarketisgoingnowhere,thenopportunityisNOWHERE.We

wanttochangethattoopportunityisNOWHERE.Ourtechniqueformovingthathyphenoverone
letteristheAlligator.TheAlligatorwillhelpustogetinonarealtrendandstayoutofmostrange
boundtradingthateatsawayatourprofits.Let'slookatexactlywhattheAlligatoris(Figure32).Later,
wewillexaminetheAlligator'sbehaviorpatterns.
WHATISTHEALLIGATOR?
Basically, the Alligator is a combination of Balance Lines using fractal geometry and nonlinear
dynamics.TheBlueline(Alligator'sJaw)onFigure33istheBalanceLineforthetimeframethatthe
chartisshowing.The Red line(Alligator'sTeeth)istheBalanceLineforonesignificanttimeframe
lower.TheGreenline(Alligator'sLips)isaBalanceLineforonemoresignificanttimeframelower.
TheAlligator'sLips,Teeth,andJawsshowtheinteractionofthevarioustimeframes.Becausemarkets
trendonlyabout15to30percentofthetime,wewanttogowiththetrendsandstayoutofthebracketed
orrangeboundmarkets.WehavefoundtheAlligatoranexcellent guide.Whenallthree lines are
intertwined(seeFigure33),Line(theAlligator'sJaw).Wetakethatfractalasourfirstentryandthen
addonaggressivelyinthatdirectionforanyofthefivedimensionalsignals,includingthezonetrades.
WeplaceourfirstStoptoExit(notaSARStopandReverse)justinsidetheAlligator'sTeeth(Red
line)onaStopCloseOnlyorderforthedailiesandStopCloseOnlyforthecloseofthebaronanyother
timeframe.Ifthemarketgoesourway,wetrailastopafterwehavehadfiveconsecutivebarsofthe
samecolor.ThistechniqueiscoveredinChapterSeven.
Figure33AlLigatorAnatomy101.
theAlligatorissleepingandthemarketisrangebound.Themarketistakingbackwhatwegained
duringthelasttrendmove.ThepurposesoftheAlligatorareto:
1.Provideanintegratedapproachtomonitoringthemarket'smomentum.
2.Provideasimpleindicatorforwhentotradeonlywiththecurrenttrend.
3.Createaprotectiondevicesoastonotlosemoneyduringabracketed,rangeboundmarket.
Hereisourbasicstrategy:wewanttowaitforthetrendtoproveitselfbygivingusafractalthatis
above/belowtheAlligator'smouth(thefractalsignalwillbeexplainedinthenextchapter).Ideally,but
notalways,allfivehighs(orlows,inadownmove)shouldbeonthesameside(higherforbuysand
lowerforsells)oftheBlueBalanceAfullexplanationoftheBalanceLinewhatitmeansandhowto
useitwillbepresentedinChapter8.Basically,theBlueBalanceLineiswherethepricewouldbeif
therewerenonewincominginformation.TheoriginalcalculationsforthisBalanceLineweredone
mathematically usingasupermainframe computer.Itis constructed byplotting a13barsmoothed
movingaveragethatisoffset8barsintothefuture.Again,werefertothisastheJawoftheAlligator.
TheTeethoftheAlligatoristheBalanceLineofonesignificanttimeframelower.Thecomputerfigures
theexacttimeframe(roughly,aboutafivetooneratio).IftheBluelineisonthedailies,theRedline
(Teeth)isroughlyonanhourlybasis.TheRedlineisconstructedusingan8barsmoothedmoving
averagethatisoffset5barsintothefuture.TheGreenline(Alligator'sLips)isanothersignificantly
lowertimeframe.Itisconstructedusinga5barsmoothedmovingaveragethatisoffset3barsintothe
future.Thereforeourconstructionisasfollows(Figure34):
Bluelinea13barsmoothedmovingaverageoffset8barsintothefuture.
Redlinean8barsmoothedmovingaverageoffset5barsintothefuture.
Greenlinea5barsmoothedmovingaverageoffset3barsintothefuture.

These averages are available on most retrieval machines and are also available on Investor's
Dream,ourproprietarysoftware.TheaveragescreatethreedifferentBalanceLinetimeframesonthe
samechart.
THEALLIGATORONTHEPRICECHART

Figure35isthesamechartasFigure33,butpriceshavebeenadded.Noticethatwhentheoffset
movingaveragesareintertwined,theAlligatorisasleep,andthelongerhesleepsthehungrierhegets.
Whenhewakesupfromalongsleep,heisveryhungryandchasestheprice(Alligatorfood)much
fartherbecauseittakesmorepricestofillhisstomach.WhenevertheAlligatorhashadenough,hestarts
toclosehismouthandlosesinterestineating.(Eatinghereissignifiedbyanopenmouth;sleeping,bya
closedorintertwiningmouth.)Thisisthetimeyouwanttostarttakingprofitsfromthetrendmove.
Thenyousimplysitback,lettheAlligatortakeanap,andgetbackintothismarketwhentheAlligator
startstoawaken.Figure36isaCocaColastockchart.DuringAugustandearlySeptember,theonly
logicalpositionwastobeshortthismarket.NoticethatthemouthstartedtocloseinearlySeptember,
tellingustotakeprofitandwaittoseewhethertheAlligatorwouldtakeanap.Wehavefoundthatthe
Alligatortechniquegivesusfewerlosingtradesandimprovesourwinloseratio.Itkeepsusoutof
choppymarketsandgetsusintoeverysignificanttrend.

TRADINGTHEALLIGATOR

HereisthestrategyfortradingtheAlligator.WhentheJaw,Teeth,andLipsareclosing,close
together,orintertwining,weknowtheAlligatorisgoingtosleeporisalreadyasleep.Ashesleeps,his
hungerincreases.Thelongerhesleeps,thehungrierheiswhenheawakens.Whenhewakesup,thefirst
thinghedoesisopenhismouthandstarttoyawn.Hethensmellsfood,eitherbullmeatorbearmeat,
and he starts chasing it. Normally, we stay out of the market while the Alligator is sleeping. We
basicallywanttobetoneitherthebullorthebearwhichevertheAlligatorischasing.Forourfirst
entry,wewaituntilthereisafractaloutsidethejaw.ThefractalsignalwillbeexplainedinChapter
Four.YoucanseeitonFigure37,atthefirstAjustunderthenumber1ontheleftsideofthechart.
Thisisthefirstfractalup.Noticethattherearefivemorefractalbuysignalsthatwerehitlaterduring
thisuptrend.Figure37isforcoffee.Figure38showsthesametypeofsituationinaDellComputer
stockchart.Throughoutthisbook,youwillseebothcommodityandstockcharts.Thereisnodifference
intradingstrategywhenyouusetheconceptsfromtheScienceofChaos.
ALLIGATORBEHAVIOR

Ourtradingstrategyistonottradeuntilthefirstfractalbreakoutoutsidethemouth.Thisentrywill
befullyexplainedinthenextchapter.Afterthefirstfractalbreakouthasbeentriggered,wetakeanyand
everysignalfromallfivedimensionsinthatdirection.Forexample,ifthepriceisabovetheAlligator's
mouth,wewouldonlytakebuysignalsandwouldnotgoshort.Wewouldhaveprofitprotectingstops
trailingtheupmove.Onthedownside,wewouldonlytakesellsignalsbelowtheAlligator'smouthand

wouldonlybuytoexitaposition,nottogolong.ExitproceduresarefullyexplainedinChapterNine.It
isjustthatsimple.Abovethemouthweonlygolong,andbelowthemouthweonlygoshort.This
guaranteesthatwewillnotbeleftoutofanysignificanttrendandourwhiplasheswillbekeptata
minimum.AnothersimplificationallowedbyusingtheseBalanceLinesisthatwecantradetheElliott
Waveswithoutthenecessityforaccuratecounting.IfthecurrentpriceisoutsidetheAlligator'smouth,
weareinanimpulsivewaveofonedegreeoranother.IfthepriceismeanderingaroundtheBalance
Lines,weareinareactivewaveofonedegreeoranother.Figures39and310illustratethepowerof
using the Alligator for a compass and odds maker in trading both stocks and commodities. These
unusuallygoodexamplesdemonstratethepowerofthisapproachtogleaningprofitsfromthemarkets.
The~woFiguresiiiustratethepowerofcombiningaiifivetradingdimensionsandusingtheAlligatoras
acompass.TheAlligatorclearlydelineateswhichsignalstotakeandwhichonestoleavealone.Figure
310marksallthefractal,AwesomeOscillator(AO),Acceleration(AC),andBalanceLinesignals.You
canseehowtheaggressive
Figure310TradingalLfivedimensionsin31/2monthsintheS&PdaiLies.
addonsduringatrendmovegiveyouanexponentialprofitcurve.(AOandACareexplainedin
laterchapters.)Thecoffeemove(Figure39),whichcoveredlessthantwomonths,generatedaprofitof
over$500,000basedontradingonecontractforeachsignal.Thisfivedimensionalstrategyallowsusto
havethereachableprofitgoalof3to5timesthetrendmove.Inotherwords,ifatrendis200points,our
goalistotake600to1,000pointsfromthatmove,basedontradingonecontractpersignal.TheS&P
chart(Figure310)showsthesignalsthatwouldhavebeentakenusingtheAlligatorasthecompass
whiletradingjustoverthreemonthsoftheS&P500onadailychartwithnointradaytrades.Again,it
shouldbepointedoutthattheseareespeciallygoodresultsandusingthesetechniqueshasproventobe
consistentlyprofitable.Allthesesignalsareeasytorecognizeandcanbegeneratedautomaticallyusing
oursoftware,whichisavailableforuseonmostpriceformats.

SUMMARY

ThischapterintroducedtheideaofusingtheAlligatortosharpenupentriesandexitsandtocutdown
onwhiplashes.Whatmovesthecommodityandstockmarketsaretradersrespondingtonewincoming
information(Chaos).TheBalanceLineiswherethemarketwouldbeiftherewerenonewincoming
information.Inotherwords,themarketsonlymovewhenChaosispresent.IfthereisnoChaos(new
incominginformation)themarketswouldbestatic.Ourjobistoferretoutthecharacteristicsofthisnew
incominginformationandtouseittoouradvantagewhiletrading.Inthenextfivechapters,wewill
examineeachofthefivedimensionsofthemarketandhowtotradethemforprofit.InChapterNine,we
willuseChaostheoryforsqueezingthemaximumamountofprofitfromeachtrade.Atthispoint,you
shouldthoroughlyunderstandtheworkingsoftheAlligatorandthethreedifferentBalanceLines.You
shouldalsounderstandhowtodeterminewhentheAlligatorissleepingandwhenheishunting.