- Social Trading
- Offering
- Resources
- Company
- About Us
- Help & Support
- Partnerships
One of great complimentary trading tools, Awesome oscillator is commonly used for day trading and mid-term strategies. In this article, you will find out how to calculate the oscillator, ways to interpret its signals and to use it in your trading strategies.
The Awesome Oscillator, along with the Alligator indicator, is another brainchild of the famous trader Bill Williams. Williams first introduced it in his book “New Trading Dimensions: How to Profit from Chaos in Stocks, Bonds, and Commodities”.
This is a trading tool used for analyzing price trends and upcoming changes in the market sentiment regardless of movements - upward or downward. The Awesome Oscillator shows the strength of the trend over a short period relative to the strength of the trend over a long period.
In the trading terminal, it looks like a histogram under the price chart. Its values change relative to the zero line, the color of its columns also changes depending on the price dynamics (usually green and red). It helps the trader make the right decisions when assessing the market.
The name “awesome” probably appeared because the author himself was very proud of his indicator and considered it “the best momentum indicator available in the stock and commodity markets.” However, in reality, many traders prefer to use the classic moving average convergence/divergence or MACD indicator instead.
Anyway, Awesome indicator proved its efficiency for predicting upcoming trend changes even on short time frames and can be successfully combined with other trading tools and indicators.
Aside from the above mentioned technical indicators, Bill Williams also developed the Accelerator indicator. It is based on the difference between the awesome oscillator and a 5-period simple moving average. This instrument serves to define early changes in momentum. Besides, it helps traders to predict price changes by evaluating acceleration or deceleration of market momentum.
From the visual standpoint, the accelerator indicator is similar to its ‘awesome’ counterpart: green lines represent upward movements, and red - downward movements. But there are a few differences, though.
When the (Awesome Oscillator) AO crosses the zero line from above or below (does not matter), this is not a trading signal - we just see the signs of possible bearish or bullish periods. The accelerator oscillator allows users to define positive or negative moments to avoid deals that may turn out to be risky. For example, experienced traders don’t recommend buying assets if the last bar on the current chart is red, or selling assets when the last bar is green. This approach helps them make more efficient decisions when entering or exiting volatile markets.
This oscillator was created to evaluate market momentum and define potential trend reversals by comparing a 34-period simple MA to a 5-period simple MA. The simple moving average is calculated by adding the average price of each day and dividing the sum by the number of days from the chosen period.
Consequently, these price movements are displayed on the histogram with two simple moving averages presented and compared. When the 5-period SMA is greater than the 34-period SMA, the histogram gets above zero, which is considered a bullish signal. In the opposite case, when the histogram dives below zero, and the short-term average is less than the long-term average, we see a bearish market coming.
Hence, the awesome oscillator displayed the market momentum by means of the histogram bars moving relative to the zero line. Each bar stands for a single period and will be green when the day’s average is higher than on the previous day (and vice versa for the red color).
Awesome oscillator is similar to the popular MACD indicator, but for AO, calculations are made not by closing prices, but by median prices. To get AO, the difference between the 5-period moving average 5 and 34-period moving average is calculated. Thus, awesome oscillator is calculated by the formula:
AO = MA (median price, 34) - MA (median price, 5)
MA stands for simple moving average (SMA), and the Median Price is calculated as MP = (High + Low)/2, where:
High - the maximum price of the bar,
Low - its minimum price.
Let’s observe a few use cases - signals generated by the awesome oscillator and how to interpret them:
The Awesome Oscillator also allows you to spot divergences. If, for example, the price makes new highs, and the AO does not show new highs, this is a bearish divergence, the price may go down. Accordingly, a bullish divergence occurs when the price keeps falling, and the oscillator shows an increase, in which case a trend change to an uptrend is expected.
The most efficient way to use Awesome oscillator is to look for certain patterns or formations on a trading chart. Here are a few commonly used strategies that can be practiced even by beginners. Please, note that when you see a signal with such patterns, it’s recommended to use other trading tools to confirm your assumptions.
“Saucer” is a corrective strategy. A buy order is placed when the histogram bars show a downtrend, reach the zero level but cannot overcome it - growth begins. To implement the strategy, you need to have at least two green columns showing a transition to an uptrend.
A signal to buy during the saucer formation appears when:
A signal to sell during the saucer formation appears when:
In both cases, at least three columns of the histogram are needed to form the Saucer.
The Twin Peaks formation shows an uptrend when a double low appears below the zero level. But the order is placed after the formation of at least two columns of the same color, showing a reversal to an uptrend. There are a few rules to mind:
A sell order is placed after the formation of two peak highs above the zero level after two columns of the same color are formed, indicating a trend reversal to the downside. The Twin Peaks shown by the Awesome Oscillator in this case is an analogue of the classic “double top” and “double bottom” chart patterns.
To exercise this strategy, mind that:
This is a simple strategy: when you see the histogram crossing the zero line, it is a signal of trend change.
For example, a buy signal happens when the histogram goes from the area of negative values to the positive area (crosses the zero level from the bottom up). In this case, a stop-loss should be placed above the high of the price, which corresponds to the first column in the positive zone. On the other hand, when the awesome oscillator goes from the positive zone to the negative zone, you should consider opening a short position.
Note that using this strategy alone should be avoided as the indicator crossing the zero line may give you false signals. So trusting it blindly is a surefire way to lose your capital.
Another way to use Awesome Oscillator in your trading strategy is to spot divergences. When the price draws a new extreme, and the Oscillator shows the opposite dynamics, this indicates a fading trend and a high probability of movement in the opposite direction. You can implement the strategy using only one Awesome Oscillator, but it won’t be enough to confirm your predictions.
There are several reasons to use Awesome Oscillator in your trading strategy:
As we have already mentioned, using the Awesome Oscillator alone can be a misleading strategy because it may generate false signals. Hence, it’s important to find blind spots in setups and discover ways to reduce risks. There are two typical situations when the Awesome Oscillator may lead you to mistakes:
Awesome oscillator is a convenient tool for defining market trends - it can be used by both beginners and seasoned traders. Thanks to its comprehensive visuals and customization, AO can be applied to any timeframe, but proves to be particularly useful for short- and mid-term trading.
However, this oscillator alone is not enough to get the full insight into the market, so don’t get its signals wrong. Use AO with other trading tools, especially the ones measuring asset price and volumes - it will allow you to analyze both historical performance and traders’ current sentiments.
Read more
Maxim Bohdan
Copyright © 2024 – All rights reserved.
NAGA is a trademark of The NAGA Group AG, a German based FinTech company publicly listed on the Frankfurt Stock Exchange | WKN: A161NR | ISIN: DE000A161NR7.
The website is operated by NAGA Capital Ltd which is authorised and regulated by the Financial Services Authority Seychelles (FSA) under licence No. SD026. The registered address of CT House, Office 9A, 2nd Floor, Providence, Mahe, Seychelles. Tel: +248 4373121
The group also includes NAGA Global (CY) Ltd, with registered address at Nikokreontos 2, NICE DREAM, 6th floor, Flat/Office 601, 1066, Nicosia, Cyprus. NAGA Global (CY) Ltd is wholly owned by The NAGA Group AG.
RISK WARNING: Derivatives are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how derivatives work and whether you can afford to take the high risk of losing your money. This is not investment advice. Trading with NAGA Trader by following and/or copying or replicating the trades of other traders involves high levels of risks, even when following and/or copying or replicating the Lead Traders. Such risks include the risk that you may be following/copying the trading decisions of possibly inexperienced/unprofessional traders, or traders whose ultimate purpose or intention, or financial status may differ from yours. Before making an investment decision, you should rely on your own assessment of the person making the trading decisions and the terms of all the legal documentation.
Restricted countries: NAGA Capital Ltd does not provide services for the residents of certain countries, such as Afghanistan, Albania, American Samoa, Anguilla, Australia, Austria, Barbados, Belarus, Belgium, Bermuda, British Indian Ocean Territory, Bulgaria, Burkina Faso, Canada, Cayman Islands, Central African Republic, Christmas Island, Cocos (Keeling) Islands, Congo, The Democratic Republic of the, Croatia, Cyprus, Czech Republic, Denmark, Estonia, Falkland Islands (Malvinas), Finland, France, Germany, Gibraltar, Greece, Guam, Haiti, Heard Island and McDonald Islands, Hungary, Iceland, Iran, Islamic Republic of, Ireland, Isle of Man, Israel, Italy, Jamaica, Japan, Jersey, Korea, Democratic People's Republic of, Latvia, Libyan Arab Jamahiriya, Liechtenstein, Lithuania, Luxembourg, Mali, Malta, Montserrat, Mozambique, Myanmar, Netherlands, New Zealand, Norfolk Island, Norway, Palestinian Territory, Occupied, Pitcairn, Poland, Portugal, Romania, Russian Federation, Saint Helena, Ascension and Tristan Da Cunha, San Marino, Senegal, Serbia, Slovakia, Slovenia, Somalia, South Georgia and the South Sandwich Islands, South Sudan, Spain, Sri Lanka, Sweden, Switzerland, Syrian Arab Republic, Trinidad and Tobago, Tunisia, Turks and Caicos Islands, Uganda, Ukraine, United Kingdom and any other countries where the citizens have British proof of identity (i.e. British Virgin Island, Gibraltar, Isle of Man etc.), United States, U.S. Minor Islands, Vanuatu, Virgin Islands, British, Virgin Islands, U.S., Yemen, and Zimbabwe.