Bill Williams, a famous technical analyst and charting enthusiast developed a non-limiting indicator called Awesome Oscillator or AO. It is a non-limiting oscillator that is used to identify the strength and the weakness of a particular stock. This information is used by traders and brokers to anticipate the movement of the market, upcoming trends, and to check if there are any possible reversals. The AO considers a wide frame of reference for comparing the current market momentum with the general market momentum. Thus, it can also be used for comparison as it reflects the driving forces of the market.
The Awesome Oscillator Formula
What is an Awesome oscillator indicator? The awesome oscillator is a histogram trading indicator that compares the current 5 bars with the 34 bars of the wider trends. The Awesome Oscillator is created to detect the bearish or bullish trend.
Awesome Oscillator Formula represents the difference between the simple moving average of the median price for the last 5 periods and the simple moving average of the median price for the last 34 periods.
Median Price: (High+Low)/2
Awesome Oscillator = SMA (median price of 5-period) – SMA (median price of 34-period), where SMA stands for Simple Moving Average.
The Awesome Oscillator is an extension of Bill Williams’ other invention, the Alligator. The MACD mechanism is considered to be the base mechanism that was used for the development of the AO. Several changes were made to the mechanism to ensure that the AO doesn’t lag in areas where the indicators fall short. Market indicators tell us about the sentiment of the market but the oscillators give us confirmed trends. They are also adept at predicting possible movements and impulses.
To see the exact change, the 34-period SMA is reduced from the 5-period SMA. The AO is different than market indicators in many ways. Indicators use closing prices to calculate the moving averages while the AO focuses on the midpoints of the bars for the same purpose, which is the arithmetic averages.
In the AO the periods are set by its creator and cannot be changed. This is one of its most unique features. In CFDs and Forex, the AO is used in combination with other indicators and oscillators to derive more accurate results.
Decrypting the Awesome Oscillator Histogram
The AO is represented as a histogram with green and red bars as its default setting. It is easy to understand. If the bar is red, it is lower than the previous one but if it is green, it is on the higher side. The divergences lie between the 5-period and the 34-period averages.
The 5-period MA can lie on any side of the 34-period MA. Based on the 5-period MA, the bars are built by the oscillators above or below the zero level. The value of the AO will be positive if the bars are above the zero line but negative if they are below it. The divergencies in the moving averages are directly proportional to the trends. There will be an increase in the divergencies if the trends are increasing. This will result in the stretching of the oscillator bars. They will move up with bullish trends and down with bearish trends.
How to read Awesome oscillator
Zero Line crossover, Saucers, and Twin Peaks are the three trading signals generated by the AO. Let’s read more about these to understand how this oscillator works:
- Zero Line crossover is a simple signal but many don’t find it reliable enough. It signals the momentum change. If you are a new trader, you can easily understand it. If the bars move from negative to positive (moving above the zero lines), it will indicate a buy signal. If the bars move from positive to negative (moving below the zero lines), it will indicate a sell signal. Many traders don’t rely on this signal alone as it does not provide a comprehensive and complete analysis.
- Saucers depict three consecutive bars. These are simplified analogs of a chart pattern. The three bars are presented in a way that the two extreme ones stay almost the same height and longer than the middle one. The bars stay above the zero lines if the saucer is bullish. In this case, the first two lines are red and the third one is green. Both the red and the green bars on the extreme stay higher than the middle red one, indicating buy signals. In the bearish saucer, the three bars stay in the negative region, below the zero lines. The second green bar is shorter than the first green bar. Since the bars are in the negative zone, the second bar is less negative. The third bar is almost equal to the length of the first bar. The three bars and their positions indicate a downtrend, giving sell signals.
- Twin Peaks create a pattern on the histogram, reflecting net convergences/divergences. You can get accurate results when the two peaks and the trough between the two remain on the same side of the zero lines. If the oscillator builds two continuous lows below the zero line, where the second low is shorter than the first low (less negative), it signals that it’s time to buy. These are bullish twin peaks. If the oscillator builds two continuous peaks above the zero line, where the second low is shorter than the first low (less positive), this also indicated a buy signal because in this case, the trend is expected to reverse because it has outlived itself.
How to Make Trading Strategies Using the Awesome Oscillator
Only one indicator or oscillator is not enough to devise a perfect trading strategy. Just like other tools are in combinations, the Awesome Oscillator is also paired with other indicators and oscillators, for example, with the Accelerator Oscillator (AO), and the Parabolic SAR indicator, the EMA, and the Stochastic Oscillator.
Here are the three possible ways in which you can use the AO and make a trading strategy:
- Using the Zero Line Crossover: If the oscillator falls from the positive side of the zero lines to its negative side, it’s time to open a sell position. Do the opposite if the oscillator moves above and reaches the positive side.
- Using the Saucers: The strategy is almost the same in this case as well. If the bars are in the negative zone, it is time to open a sell position and if they are above the zero levels, it is an indicator to open a buy position.
- Using the Twin Peaks: The strategy using the twin peaks is different than the other two. You should open a sell position if the bars and the trough between them lie in the zone above the zero lines. In this case, the second line should be lower than the first line. And, you can open a buy position when the bars in the negative zone with the second low higher as compared to the previous one.
The AO is preferred by many traders but if used alone, it can show you half a picture and can be misinterpreted. The parameters of this oscillator are fixed by its creator and you can only change the color of the bars. It has many useful functions and is easy to understand. We would suggest you use it in combination with other reliable indicators and oscillators.