The Awesomeness Behind the Awesome Oscillator

Zahir Shah |

Everything_is_Awesome.jpg

A legendary American trader named Bill Williams once introduced a market momentum indicator to participants of the foreign exchange market; he called it the Awesome Oscillator. In his pursuit of a successful prediction of market movements, he wanted to observe simple moving averages, as well as minor and major changes that can sway a trend to a particular direction. And, due to his experience in studying the psychology of Forex environments, he is certain that with the development of such a Forex tool, a detailed report could be given.

The Awesome Oscillator’s reliability had been proven by the inventor himself, as well as by fellow technical analysts and Forex traders. So, how “awesome” is this indicator, really?

More about the AO

The Awesome Oscillator, or AO for short, is a Forex indicator that focuses on tracking the changes in market momentum. As mentioned, it was created by Bill M. Williams, a respected individual in the Forex market; since the creator is known to be a successful authority in finance communities and is a professional who understands different Forex concepts, many traders are quite confident with the tool’s employment.

When using the Awesome Oscillator, watch out for three significant indications:

  1. Naught Line Crossing - or a line in an uptrend that changes from a negative value to a positive value

  2. Saucer - or consecutive columns that are located on top of a naught line crossing

  3. 2 Pikes - or consecutive columns that are located below a naught line crossing

Calculation for a Familiar Trading Strategy

The Awesome Oscillator comes with similarities to an SMA (or simple moving average) crossover strategy. By evaluating each of its components, as well its main concept as a market momentum indicator, it can be deduced that it is the difference in the SMAs of two periods. Depending on where the short-term and long-term SMAs land, buy and sell signals can be identified.

One of the most awesome aspects of the Awesome Oscillator is its simplicity. To employ it, focus on a chart’s 5-bar and 34-bar periods. Then, gather four important pieces of data:

  1. The simple moving average of bar # 5

  2. The simple moving average of bar # 34 in a chart

  3. The highest point that was reached

  4. The lowest point that was reached

The Formula:

AO = {5 SMA X [(high + low) ÷ 2]} – {34 SMA X [(high + low) ÷ 2]}

Taking a Hint

When the Awesome Oscillator yields a zero reading, it is indicative of the absence of market momentum. While this may be read as a sign of an inactive market, this is also a cue to prepare for a streak of significant market movements; in a way, you can determine whether buying positions or selling positions are to be established. More importantly, setting stop orders should always be part of any trading activity.

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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