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Awesome Oscillator in Trading

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Bill Williams, an American trader, and author developed the Awesome Oscillator Indicator. It is a momentum indicator for the stock market in which the gap between a 34-period and a 5-period Simple Moving Average is calculated. The Simple Moving Averages are constructed using the midpoints of each bar rather than the closing price. AO is commonly used to confirm trends or predict potential reversals.

Like the Moving Average Convergence Divergence (MACD) indicator, the subject indicator compares the market momentum of a small number of current periods to the momentum of a greater number of preceding periods. The indicator has a zero line in the middle, and price movements are depicted on either side of it using a comparison of two different moving averages.

The Awesome Oscillator is beneficial for technical analysis since it changes the calculation of multiple standard momentum oscillators to reinforce a common weakness. It is most useful when additional technical analysis identifies corroborating signs or situations.

Calculation

Knowing the Awesome Oscillator’s underlying mathematics allows traders to make more informed judgments while trading in complicated circumstances. Charting systems and trading software now calculate the indication for us, so we don’t have to.

The AO histogram is made up of a 34-period simple moving average drawn through the center points of the bars (H+L)/2 and reduced from a 5-period simple moving average drawn across the center points of the bars (H+L)/2.

  • M. P. = (High + Low) / 2
  • AO = SMA (Median Price, 5) – SMA (Median Price, 34)

Where,

  • M. P. = Median Price
  • High = the highest price of the bar
  • Low = the lowest price of the bar
  • SMA = Simple Moving Average

The coloration of the bars is used to classify and represent momentum in the majority of graphs. The bars will be green when the momentum is more than the preceding one, indicating an upward momentum. The bars will be red when the momentum is lesser, indicating downward momentum.

Trading with Awesome Oscillator

Depending on the current market momentum, you may select from a variety of awesome oscillator trading methods. Each awesome oscillator technique aims to confirm or refute trends while also identifying possible reversal moments. The subject oscillator can assist a trader in determining when or if they should initiate a buying and selling position based on the awesome oscillator’s indications.

Saucer Strategy

Several analysts utilize the awesome oscillator saucer as a trading indicator to predict potential fast shifts in momentum. This saucer approach includes searching for three successive bars along the same end of the zero line that has changed.

For a bullish saucer to be formed, the oscillator should be over zero. Along with this, two successive red bars should be present, where the first bar is above the second bar.

On the other hand, a bearish saucer may be distinguished by two successive green bars underneath the zero line – the second bar being lower than the first – followed by a red bar.

Twin Peaks Strategy

Twin Peaks is a technique that considers the gap between different peaks on the same side of the zero line. If there are two peaks underneath the zero line, it’s called a Bullish Twin Peaks scenario. A green bar follows the second peak, which is higher than the previous one. Furthermore, the gap between the two peaks must stay underneath the zero line for the whole duration.

If two peaks are over the zero line, it’s a Bearish Twin Peaks configuration. A red bar follows the second peak, which is lower than the preceding one. While this setup remains, the gap from one peak to the other should be over the zero line.

Zero Line Crossover

When the awesome oscillator moves from below to above the zero line, it is called a bullish zero-line crossover. It is referred to as a bearish zero-line crossover if it moves from over to below the zero line. Such movements might indicate a turnaround of the last trend line.

Whenever the awesome oscillator moves below from upwards of the zero line, traders generally start a short trade. Conversely, once the awesome oscillator passes downward to over the zero line, they will open a long position.

When starting a short position, traders seek a continuous streak of three or more red bars in a bearish zero-line crossover. And traders search for a continuous run of three or more red bars in a bullish zero-line crossover.

Takeaway

Overall, the Awesome Oscillator may be an extremely useful instrument. In some cases, momentum can be utilized to produce high-quality signals, but it should be handled with caution, as with any signal-generating indication. The smartest traders learn to truly grasp the settings and avoid misleading signals via patience and persistence. Nonetheless, the Awesome Indicator generates high-quality data and might be a useful technical indicator for several analysts and traders.

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