Some experienced traders may only roll their eyes when they hear the following mantra, but it is worth repeating it as often as possible, “the trend is your friend”. Most professional and expert traders believe that the sooner you recognize the market trend, the more success you can have by trading in the direction of the trend. It is therefore important to have the right technical indicators to help identify the trend and direction as early as possible. This is precisely what the accelerator oscillator indicator was invented to do.
What is the Accelerator Oscillator indicator?
The accelerator oscillator is one of the many popular trading indicators invented by world-renowned technical analyst Bill Williams. Williams assumed that the direction of the momentum would always change before the course, which is why one could gain an advantage if one also pays attention to the momentum instead of just the course. The Bill Williams’s accelerator oscillator tries to track changes in momentum as early as possible, whether the momentum is accelerating or decelerating.
Williams believed that the direction of momentum changes before the price trend. There is a change in the acceleration of momentum even earlier. He developed the accelerator oscillator (sometimes referred to as the accelerator decelerator oscillator indicator) as a tool to make this change measurable.
How is the Accelerator Oscillator calculated?
The accelerator oscillator is derived from the awesome oscillator (AO), another Williams’s creation. The Awesome Oscillator compares a 5-period SMA with a 34-period SMA to gain insight into the momentum of the market. Specifically, the awesome oscillator is a 34-period simple moving average (SMA) of the course average that is subtracted from the 5-period SMA of the course average.
The accelerator oscillator is formed by subtracting the 5-period SMA of the AO from the AO:
Accelerator Oscillator = AO – SMA5 (AO)
Calculating an indicator that depends on another indicator, which in turn is made up of several moving averages, would be a tedious task by hand. Fortunately, there are the trading platforms MetaTrader 4 (MT4) and MetaTrader 5 (MT5), which automatically take over all these calculation steps for you. These platforms have the accelerator oscillator indicator built-in and ready to load on your charts.
How to use the Accelerator Oscillator?
Using the accelerator oscillator in the MT4 and MT5 trading platforms is simple because the indicator is already installed.
Although the accelerator indicator is an oscillator, it is listed in MetaTrader under “Bill Williams,” as can be seen in the following screenshot:
A double click on “Accelerator Oscillator” in the navigator window on the left opens the dialog window shown above. You can change the appearance of the histogram in terms of color and line width. The default colors are:
- Green for increased acceleration
- Red for increased deceleration
In the following screenshot of the EURUSD hourly chart, you can see how the indicator is displayed in a separate window below the chart window as a histogram:
You can see how the steepest increases in the course go hand in hand with successive green bars above the zero line of the accelerator oscillator.
You should pay attention to how the upward trend continues after this point. Around the middle of the chart where the price is falling, we have several consecutive red bars below the zero line of the accelerator oscillator.
According to Williams, the zero line of the Accelerator Oscillator is the place where momentum and acceleration are balanced. The following can be derived from this:
- If the indicator is above the zero line, it is easier for the acceleration to continue to increase.
- If it is below the zero lines, it is easier for the deceleration to increase.
Unlike the awesome oscillator, it is not often used as a trading signal when the zero lines are crossed but more of an idea of what direction we should look to trade using another entry criteria.
In principle, the accelerator oscillator works very simple:
- positive values are a sign of a bullish behavior of the price.
- negative values for a bearish behavior.
Williams emphasized that you should not buy when the accelerator oscillator shows a red bar and not sell when it shows green.
Accelerator Oscillator trading strategy
A simple summary of the accelerator oscillator strategy is as follows:
- If you buy above zero and sell below zero, the momentum is on our side.
- You only need two consecutive matching bars to open a trade.
- A buy signal consists of two successive green bars that are above zero.
- A sell signal of two successive red bars that are below zero.
This requires additional confirmation, which is why you should look for at least three consecutive, matching bars: three consecutive red bars to sell above the zero lines and three consecutive green bars to buy below the zero lines. I would certainly also implement further chart analysis and not trade based on the accelerator oscillator signal alone.
Williams himself recommended the alligator indicator as to the most important decision-maker regarding a potential trade opening. Awesome and accelerator oscillator can then be used as fine-tuning tools to get specific signals within the large image drawn by the alligator. Of course, you can also combine the indicators mentioned with all possible other indicators, even outside the Williams universe.
MetaTrader has an abundance of useful forex technical indicators for analysing various market conditions. Any indicator to include alongside the accelerator oscillator trading strategy can potentially help, which is why it is worth having access to as many indicators as possible.
Accelerator Oscillator Conclusion
Bill Williams designed the accelerator oscillator to try and identify the earliest signs of a possible trend change along with trend momentum. For him, that could give traders a significant competitive advantage. Trading with the trend is still an important trading philosophy today that is implemented within forex trend trading strategies.
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