Awesome Oscillator Explained
The Awesome Oscillator, designed by Bill Williams is used to measure the market momentum. Trading as a histogram, the Awesome oscillator measures the difference between the 34 period and a 5 period simple moving averages. The main difference with the way the simple moving averages are calculated is that the midpoint or the OHLC/4 is used rather than the closing prices. There are no present inputs that can be used for the Awesome oscillator. For a beginner, the Awesome Oscillator is a great way to get started with trading with indicators.
The chart below shows the Awesome oscillator applied to the charts. Also, the 34 and 5 period SMA’s based on the weighted close or the midpoint of prices are used to illustrate how the convergence and divergence in the SMA’s are reflected by the Awesome oscillator.
In a way, the Awesome Oscillator is similar to the MACD which uses as 12, 26 period moving average or even the OSMA also known as the moving average oscillator.
How to trade with the Awesome oscillator?
The Awesome oscillator comes with a pre-determined set of buy/sell signal rules.
0-line Crossing: Long signals are generated when the AO crosses above the 0-line and then exited when the AO moves back below the 0-line, where short positions are initiated. In a way, trading the 0-line crossing of the AO is just the same as trading the moving average cross over. When markets are trending strongly, the AO no doubt triggers strong signals, but the oscillator’s performance drops when prices are trading sideways.
The chart below shows a few sample buy sell signals based on the AO’s 0-line interaction. Notice some instances where a few trades would have resulted in a losing trade as prices start to move sideways coming off a strong previous trend.
Awesome Oscillator – 0 line crossing
Therefore, when using the AO as the 0-line buy/sell indicator, it is always best to use the signals in combination with other indicators to avoid the false signals.
Divergence: The AO can also be used to spot price divergences such as failure to confirm new highs or lows in the markets. The next chart below shows a few divergence set up examples where the lows were not confirmed by the AO.
Awesome Oscillator – Divergence Setup
Twin Peaks Method: Another widely used method to trade with the Awesome oscillator is the twin peaks method. In this system, long signals are taken when the AO is above the 0-line. The AO declines but then posts two consecutive Green higher bars. Long positions are taken on the candle close which signals a continuation of the uptrend. Likewise, when the AO is below the 0-line and it posts green bars and starts to pull back by printing lower low strong Red bars, it signals a short position that can be taken. The Twin cups method is illustrated in the next chart.
The Awesome oscillator as illustrated above is a simple trading indicator which can be used in a different ways, both as a standalone indicator and also in conjunction with other indicators such as moving averages, Bollinger bands or the Accelerator Oscillator.
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