Monday, March 17, 2014

Awesome Oscillator

Awesome Oscillator indicator
Awesome Oscillator shows the difference in between the 5 SMA and 34 SMA.
If to be precise, 5 SMA of midpoints is subtracted from 34 SMA of midpoints which allows to see the market momentum.

What's "awesome" about the Awesome Oscillator?
Unfortunately, besides the word "awesome" there isn't much to be impressed with. Forex markets proved to be too unstable for this indicator. On the other hand, if you're trading stocks, Awesome Oscillator will be more interesting to study, since, unlike with currencies, Stock markets sustain longer more stable trends.

Let's take a look at the Awesome Oscillator in action by simply comparing it to 5 and 34 SMA on the chart.
As you can see, the AO mirrors the up and down moves of the 5 SMA in relation to 34 SMA.
That's our momentum Up and momentum Down periods. When two SMAs finally cross, the AO also crosses its zero line.

That said, there are questions to be asked:

Does AO gives any additional information besides following the market & showing increase/decrease in momentum which we can be seen with naked eye? - we'd say No.

Is AO fast enough to send signals about the market changes and aid us with entries as well as exits? It's No again. Awesome Oscillator is slow and usually late with signals.

Practical use of Awesome Oscillator
General rules:

When AO is above zero - only Buy orders should be taken.
When AO is below zero - only Sell orders should be taken.

Buy signal:
The signal to Buy comes when AO histogram forms a series of 3 bars, where:
bar 1 - is red.
bar 2 - is red. (Defaults: bar 2 will always be lower than bar 1. No need to worry about the height comparison).
bar 3 is green. (Defaults: bar 3 will always be higher than bar 2. No need to monitor the height again).

Place a pending Buy order above the candlestick which corresponds to the first green bar on the AO histogram.

Sell signal:

Sell when AO is below zero and there is a series of 3 candles where:
candle 1 is green.
candle 2 is green.
candle 3 is red.

Place a pending Sell order below the candlestick which corresponds to the first red bar on the AO histogram.
There are 2 other rules for trading with Awesome Oscillator.
1. AO histogram divergence.
2. 4 consecutive bars (green or red) + zero line crossover.

See examples below:
Those two methods aren't used very often, but still have the right to exist and be studied.
(If you like to learn more about divergence, study examples of trading MACD divergence. MACD is the most common indicator for studying market divergence).

Combining AO with other indicators
There is a known approach of using Awesome Oscillator (AO) together with Acceleration Oscillator (AC).
The AO is used to determine the main trend while AC is used to find short-term overbought/oversold conditions in that trend.
However, if to look at this combination on practice, the AC does all the work, while AO, well, shows the trend and lags behind.

In the highlighted examples below when the AC changed color from red to green and vice verse - this was a signal to exit:
Another suggested method is to combine Awesome Oscillator with Alligator indicator and Fractals, where AO will suggest underlying trend, while a fractal formed above/below Alligator's teeth will invite for an entry. (See fractals page for details).

Awesome Oscillator formula
Awesome Oscillator = SMA (MEDIAN PRICE, 5) - SMA (MEDIAN PRICE, 34)

MEDIAN PRICE = (HIGH+LOW)/2

Where: SMA - Simple Moving Average

2 comments :

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