In the following article, we are going to take a look at the awesome oscillator indicator. This technical indicator for trading was developed by Bill Williams, who also created the accelerator oscillator and alligator indicator which help to form his trading strategy template that is readily available in the popular MetaTrader platforms. As most of you will know, the English term “awesome” means “great” or “fantastic”. The awesome oscillator is a market momentum indicator which compares recent market movements to historic market movements. It uses a zero line in the centre, either side of which price movements are plotted according to a comparison of two different moving averages. Read on to find out if the awesome oscillator indicator lives up to its name.
What is the Awesome Oscillator?
The awesome oscillator is a relatively simple indicator because it is calculated from just two simple moving averages. As is typical for an oscillator, the awesome oscillator also oscillates around a zero line. The awesome oscillator indicator can identify:
- Trending markets
- Reversal points
- Market momentum
With the help of the awesome oscillator, you can easily recognize the current trend direction. However, as with any trend-following indicator, there is a risk that the awesome oscillator will “lag” the current price movement and generate multiple false signals. Thus, I would only use it in unison with other market analysis.
This indicator can also be used to identify possible reversal points on the chart. The third application is to determine the strength of a movement. As you’ll see later in the article, you can use the awesome oscillator to create beneficial strategies. Overall, this indicator works best on smaller time intervals. In your trading platform, you should set the 5-minute, 15-minute, or 1-hour chart.
The awesome oscillator indicator is usually displayed below the chart in a separate window in the trading software. The calculated difference is illustrated with the help of bars, so that a line results which oscillates around the zero line. If a bar above the zero line is larger than the previous bar, this is shown in green.
How to calculate the Awesome Oscillator?
If you want to use an indicator like the awesome oscillator, it also makes sense to know how it is calculated. As already mentioned, two simple moving averages (SMA) are used for this:
- 5 periods SMA
- 34 periods SMA
The awesome oscillator is the difference between these two moving averages:
Awesome Oscillator = (5 period average of (high + low) / 2) – (34 period average of (high + low) / 2)
Basically, the Awesome Oscillator measures the immediate momentum of the last 5 bars and compares it to the momentum in the last 34 bars. The Awesome Oscillator indicates if bulls or bears are in control of the market. AO is a leading indicator because it tracks the momentum of the market.
Awesome Oscillator Strategy
As with most momentum indicators, divergence between the price and the momentum can also be a useful clue as to what’s going on in the market.
If an awesome oscillator bar has a lower value than a previous bar, it is shown in red. This can be a sign of a bearish market. On the other hand, if an awesome oscillator bar has a higher value than a previous bar, it is shown in green. This can be a signal that there is a bullish market.
A very simple forex strategy can be implemented with the awesome oscillator in the following way:
As soon as the zero line is crossed from bottom to top, a signal for a long trade is generated. In contrast, a signal for a short trade is generated as soon as the zero line is crossed from top to bottom. You could also use the awesome oscillator to spot price divergence and to look for trading opportunities when the bars change form red to green and vice versa.
You can also use the awesome oscillator along with double tops and double bottoms from the charts and awesome oscillator window.
Such a double bottom would arise as follows:
First, the indicator marks a new low at -50. The indicator then rises, but then falls again to the value of -50. However, the bears fail to fall below the value of -50. This suggests that prices will soon turn up.
This signal could, therefore, be used for a long trade. This strategy can be expanded by looking for divergences between the price chart and the awesome oscillator.
Awesome Oscillator Saucer
This strategy searches for quick changes in the momentum and requires a specific pattern in three consecutive bars of the AO histogram, all on the same side of the zero line. The saucer strategy involves looking for changes in three consecutive bars that are on the same side of the zero line. Awesome oscillator saucers can be either bullish or bearish. A bullish saucer requires all three bars to be on the positive side of the zero line. The construction you are looking for is a red bar, followed by a smaller red bar, followed by a green bar. A bearish saucer requires all three bars to be on the negative side of the zero line. The combination needs to be a green bar, followed by a smaller green bar (i.e. less negative in value), followed by a red bar.
Awesome Oscillator Conclusion
The awesome oscillator can be well used as a confirmatory tool to trade in the direction of the trend and with momentum. There can be multiple variations of trading strategies based on this indicator which make it flexible whilst it is also easy to interpret. The Awesome Oscillator is primarily used to measure market momentum and to affirm trends or to anticipate possible reversals. It does this by effectively comparing the recent market momentum, with the general momentum over a wider frame of reference.
Understanding the underlying formula used for construction of Awesome Oscillator helps traders take prudent decisions while trading in complex scenarios. Calculating the indicator is no longer required as charting platforms and trading software do it for us.
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