Awesome Oscillator | TrendSpider Learning Center (2024)

3 mins read

Introduction

The Awesome Oscillator is a technical indicator that helps traders identify a trend’s strength and potential reversal points. Bill Williams, a renowned trader and author of several trading books developed it. This article will discuss the basics of the Awesome Oscillator and how traders can use it to improve their trading strategies.

What is the Awesome Oscillator?

The Awesome Oscillator (AO) is a momentum indicator that uses a simple moving average (SMA) of the median price for five periods and an SMA of the median price for 34 periods. The difference between these two moving averages is then plotted as a line with its position relative to the zero level indicating bullish momentum and bars below the zero line showing bearish momentum.

The AO can be applied to any time frame but is most commonly used on daily and weekly charts. It is a versatile indicator that traders can use to identify trends, reversals, and divergences.

Example scanners based on Awesome Oscillator

The Awesome Oscillator can be used in Scanning the market. To see how exactly it can be used in this way, we provide the following samples. Both scanners search the market for stocks using this indicator.

How to Calculate the Awesome Oscillator

To calculate the AO, follow these steps:

1. Calculate the median price by adding the high and low prices for a period and dividing by 2.
2. Calculate a 5-period SMA of the median price.
3. Calculate a 34-period SMA of the median price.
4. Subtract the 34-period SMA from the 5-period SMA.
5. Plot the difference as a line chart.

The formula for the Awesome Oscillator is:

AO = SMA(median price, 5 periods) - SMA(median price, 34 periods)

How to Use the Awesome Oscillator

The AO can be used in several ways to improve your trading strategies. Here are some of the most common applications:

1. Identifying Trends

The AO can help traders to identify trends in the market. The momentum is bullish when the line is above the zero line, and the trend will likely continue. Conversely, when the line is below the zero line, the momentum is bearish, and the trend is expected to continue.

Traders can use the AO with other indicators, such as moving averages and trend lines, to confirm the trend and avoid false signals.

2. Identifying Reversal Points

The AO can also identify potential reversal points in the market. When the line changes from above the zero line to below the zero line, it indicates a shift in momentum from bullish to bearish and a potential reversal in the trend. Conversely, when the line moves from below the zero line to above the zero line, it indicates a shift in momentum from bearish to bullish and a potential reversal in the trend.

Traders should look for confirmation of the reversal from other indicators and price action before entering a trade.

3. Identifying Divergences

The AO can also identify divergences between price and momentum. A bullish divergence occurs when the price makes lower lows, but the AO is making higher lows. This indicates that the momentum is starting to turn bullish, and a reversal in the trend may be imminent. A bearish divergence occurs when the price makes higher highs, but the AO makes lower highs. This indicates that the momentum is starting to turn bearish, and a reversal in the trend may be imminent.

Traders should look for confirmation of the divergence from other indicators and price action before entering a trade.

Example strategy based on Awesome Oscillator

The Awesome Oscillator can be used in Testing Strategies. To see how exactly it can be used in this way, we provide the following sample. The strategy tests buying and selling rules built around this indicator.

The bottom line

The Awesome Oscillator is a powerful tool that can help traders to identify trends, reversals, and divergences in the market. By using the AO in conjunction with other indicators and price action, traders can increase their chances of success in the market. However, it is essential to remember that no indicator is infallible, and traders should always use proper risk management techniques and follow their trading plan.