Created by Bill Williams, the AO Divergence Indicator, in full, Awesome Oscillator Divergence Indicator is an improved version of the standard Awesome Oscillator. Subtracting the two Simple Moving Averages yields the AO Divergence indicator. The convergence and divergence of the fast and slow SMAs aid in defining the direction and strength of the movement, as well as identifying potential reversal points on the chart. This indicator appears in a separate window beneath the price chart as a colored bar histogram.
What is the AO Divergence Indicator?
This momentum indicator called AO Divergence is one which advises on trends. The green bars indicate an upswing, while the red bars indicate a downtrend. The indicator also depicts divergences as blue lines on the chart. Divergences indicate the end and beginning of a trend. The indicator’s arrows identify BUY and SELL indications.
Divergences, histograms, and the zero line are used to display multiple BUY and SELL indications. As a result, it provides precise entry and exit points (optional).
AO Divergence Strategy
This forex strategy can be used by traders to catch some good moves in a trending market when timed well, and it’s quite easy to understand and follow. When the AO Divergence indicator shows a positive divergence with a downward arrow, it indicates a sell signal. The indicator, on the other hand, depicts an upward arrow and a bearish divergence for the buy signal.
When there is bullish momentum, the histogram of this indicator exceeds zero and the upswing begins. Following another high, the bars begin to plummet and turn red. A green bar appears when the histogram does not go below 0 and then reverses upwards. In the case of bearish momentum, the indicator’s histogram falls below zero and begins to decrease. After another low, the bars begin to rise and turn green. If the histogram does not rise above 0 and then reverses downward, a red bar appears. The BUY and SELL signals are also depicted by the zero line. A buy signal is indicated when the histogram crosses level 0 from below. If, on the other hand, the histogram passes level 0 from above, it indicates a sell signal.
Buy Signal
This could be your checklist for a buy trade:
- When the Awesome Oscillator crosses the zero line upward.
Once this event occur, you could do the following:
- Open a buy position just immediately after the Awesome Oscillator crosses above the zero line.
- Set your stop loss just below the nearest swing low of the timeframe you used for your entry.
- Set your take profit at the nearest resistance zone.
- For good risk management, I would only pick the trade if your risk to reward ratio is 1:2 or more.
Sell Signal
This could be your checklist for a sell trade:
- When the Awesome Oscillator crosses the zero line downward.
Once this event occur, you could do the following:
- Open a sell position just immediately after the Awesome Oscillator crosses below the zero line.
- Set your stop loss just above the nearest swing high of the timeframe you used for your entry.
- Set your take profit at the nearest support zone.
- For good risk management, I would only pick the trade if your risk to reward ratio is 1:2 or more.
AO Divergence Pros & Cons
Pros
- It can help identify price reversal and corrections.
- It’s easy to read even by novice traders.
- During a trending market, this is can be an effective indicator.
- It enables you to gauge market momentum using buying or selling power.
- It’s a versatile tool that may be applied to a variety of assets.
- It can be used in a variety of techniques to receive trade signals.
Cons
- This indicator can generate false signals sometimes, thereby misleading the trader.
- Readings on slow-moving equities can be deceptive, particularly in short timeframes.
Conclusion
Awesome oscillator is a useful instrument for establishing market trends that can be utilized by both novice and experienced traders. AO can be used on any timeframe due to its comprehensive aesthetics and customisation, although it is especially beneficial for short- and mid-term trading.
However, this oscillator alone will not provide you with a whole picture of the market, so don’t misinterpret its indications. Combine AO with other trading tools, particularly those that measure asset price and volume, to examine both previous performance and traders’ present sentiments.
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