Watch the testing video here:
What is the Awesome Oscillator?
The Awesome Oscillator Indicator (AO) is a technical analysis indicator created by an American trader Bill Williams as a tool to determine whether bullish or bearish forces dominate the market. It measures the market momentum with the aim to detect potential trend direction or trend reversals. The market momentum is evaluated using a combination of a shorter time frame and longer time frame simple moving averages or stated differently, it 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. Although it may look like the awesome oscillator formula is complex, the reality is that it fairly simple and it is as follows:
Midpoint value = (Bar high – Bar low) / 2
Awesome Oscillator = SMA5 – SMA34
The indicator is plotted as a histogram in a box at the bottom of the chart and the histogram bars are found in either of the two colours red or green (with some trading platforms the lines can be red or blue). When the midpoint value of the last price is higher than the previous bar midpoint, the histogram will be green (blue) and if the midpoint of the last bar is lower compared to the previous bar, it will be red.
In simple terms, the bar will be green if it has a higher value compared to the previous bar and it is red if its value is lower compared to the previous bar. Another element is the zero line around which the indicator oscillates and moves between positive or negative values. If the indicator values are above the zero-line, it means that the shorter period is higher than the longer time frame and vice versa, if the faster period is lower than the longer period the indicator will be below the zero-line. Thus, when the histogram moves above the zero-line, it is indicating that bullish forces drive the market and when the Awesome Oscillator values are below the zero-line, it will point toward a bearish momentum.
How to use Awesome Oscillator?
There are a variety of strategies which could be used by traders to identify potential trading opportunities. Some of the well-known and basic trading setups are the zero-line crossover, the twin peaks, the saucer and divergence.
Awesome Oscillator and zero-line crossovers
The basic alerts which are generated by the Awesome Oscillator are identified on the basis of the zero-line cross overs.
- A bullish buying opportunity alerts occur when the AO indicator crosses above the zero-line, indicating that the short-term momentum is increasing faster compared to the long term.
- A sell opportunity is detected when the indicator crosses below the zero-line mark displaying that the short-term momentum decreases more rapidly than the long-term.
Look at the following graph.
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