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Trading indicator: Awesome Oscillator (AO)

When trading, there are multiple tools available to you. Here we are reviewing one of the most popular ones, Awesome Oscillator.

  • The 'Awesome Oscillator Indicator' ('AO' in short) is a technical analysis indicator created by US trader Bill Williams. This tool intends to identify whether bullish or bearish forces dominate the market. It measures the market momentum. Its goal is the deteection of potential trend direction or trend reversals. The market momentum is determined using a combination of a shorter time frame and longer time frame simple moving averages. The AO considers the recent momentum in comparison with a higher frame momentum. The Awesome Oscillator is calculated as the difference between the newest 5 periods (bars) simple moving average (SMA) and the 34 bars simple moving average. But instead of the closing price, the indicator uses the bar midpoint value.

  • The AO histogram bars will be either red or green. When the midpoint value of the last price is higher than the previous bar midpoint, the histogram will be green and if the midpoint of the last bar is lower compared to the previous bar, it will be red.

  • When the AO histogram moves above the zero-line, it indicates bullish forces driving the market and when the AO values are below the zero-line, it will point toward a bearish momentum.

1/ Look for crossover signals above or below the zero line

Above you can see the AO crossover signals (i.e. signals of buying and selling opportunities when the zero line is crossed downwards - selling opportunity and upwards - buying opportunity).

2/ Look for twin peaks

There can be bullish twin peaks or bearish twin peaks:

- Bullish twin peaks – two consecutive peaks below the zero line where the second peak is higher compared to the first one and followed by a green bar. Keep in mind that the pullback (trough) between the two peaks should remain below the zero-line.

- Bearish twin peaks – this setup appears when there are two peaks above the zero line and the second peak is lower than the first one and is followed with a red bar. Also, the pullback between the peaks should remain above the zero-line.

3/ The saucer strategy

The saucer setup signal means a specific setup of three consecutive bars on the AO histogram allowing the detection of a possible bullish or bearish signal:

- Bullish: Red bar + lower red bar + green bar = Buy on the next bar

- Bearish: Green + lower green + read = Sell on the next bar

This is more of a very short term trading approach and it is not full-proof. We actually believe that this third approach is less reliable than the previous 2 described above.

In any event, bear (no play on words) in mind that the Awesome Oscillator trading strategy can be very useful for identification of potential alerts, provided that it is always used in combination with other indicators to confirm your analysis.

As always, be cautious and wait until confirmation of the first signals before making the decision to buy or sell.

  • Sources:

- How to read and use the Awesome oscillator trading indicator?, Zoran Temelkov, 2020

- Investor Accelerator course, Jason Pizzino

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