What Is The Detrended Price Oscillator & How To Trade With It

The Detrended Price Oscillator (DPO) indicates when market trends may stop and can be used to determine cycle highs and lows along with estimate cycle times. The DPO does not apply to the last date because it is based on a moving average. The indicator can show intermediate overbought and oversold levels effectively.

What does the Detrended Price Oscillator measure?

The detrended price oscillator (DPO) measures the difference between the past price and the moving average. Note that the DPO itself is placed on the left. The indicator fluctuates above/below zero when prices move above/below the moving average. The chart below shows the USD/CAD pair with a change in the 20-day moving average of -11 days. A 20-day DPO will appear in the lower indicator window. Note how positive/negative the DPO is if the price is above the moving average and if the price is below the participating moving average.

Detrended Price Oscillator
Detrended Price Oscillator

Detrended Price Oscillator calculation

The price {X / 2 + 1} periods minus the simple moving average of period X.

X: number of periods used to calculate the lower oscillator.

The 20-day DPO uses a 20-day SMA, which is compensated by 11 periods {20/2 + 1 = 11}. This shifts the 20-day SMA 11 days to the left, putting it in the middle of the reviewed period. The 20-day SMA value is then deducted from the price in the middle of the release. In short, DPO (20) is the price that deducts the 20-day SMA before 11 days.

How to use the Detrended Price Oscillator?

Although the DPO indicator appears to be a classic oscillator but it is not for momentum signals. The simple moving average has been established in the past, so the DPO is presented in the past. Even at this offset, the DPO’s peaks and valleys can be used to estimate the length of the cycle. DPO filters out longer trends to focus in shorter cycles. The following daily chart of USD/CAD shows that the price marked the lows in early July, early August and early September while the October missed the pattern. There are about 20 days between these cycles. The cycle shows the second half of 2019.

Detrended Price Oscillator cycles USDCAD
Detrended Price Oscillator cycles USDCAD

If we simply observe the price and the indicator with the naked eye, it seems quite accurate in predicting the price. However, the indicator cannot clearly inform the traders whether the price has reached the top or bottom until the price starts moving in the counter direction.

For example, take a look at the following chart:

Detrended Price Oscillator Uncertainty
Detrended Price Oscillator Uncertainty

The recent price action does not clearly inform whether the trend will continue or reverse from here. That will only become obvious when the price starts moving to a certain direction.

Detrended Price Oscillator drawback
Detrended Price Oscillator drawback

If you look at the highlighted part of the chart above, it looks like DPO is showing a top and the value of DPO started falling as well but the price did not stop rising more.

However, this tool can be of great use for the long-term traders who like to add more positions on each weakness or strength and then hold the positions for a long period of time.

Apart from the inabilities and drawbacks of the DPO, the indicator helps to determine the top and bottom effectively. iIt can be used for trading forex, stocks, commodities, precious metals, indices, cryptocurrencies and more.

Detrended Price Oscillator trading strategy

You can combine other trend indicators with the Detrended Price Oscillator but here we will present a simple trading strategy that does not include any other indicators. We take the zero line as the decisive point to enter the trade. The same zero line can indicate the exit of a trade as well.

Detrended Price Oscillator buy trade setup

  • We may buy an asset if the value of DPO crosses above the zero line.
  • We may place the stop-loss slightly below the recent swing low.
  • We may exit when the DPO value crosses below the zero line.
Detrended Price Oscillator buy trade setup
Detrended Price Oscillator buy trade setup

Detrended Price Oscillator sell trade setup

  • We may sell an asset if the value of DPO crosses below the zero line.
  • We may place the stop-loss slightly above the recent swing high.
  • We may exit when the DPO value crosses above the zero line.
Detrended Price Oscillator sell trade setup
Detrended Price Oscillator sell trade setup

Detrended Price Oscillator conclusion

The detrended price oscillator can be a useful trading indicator to incorporate within your trading strategies. However, there can be many false signals produced as with any other forex indicator.

I would prefer to use the majority of technical indicators such as the Detrended Price Oscillator on the 1-hour charts and above. I tend to find that these charts contain less market noise than the lower time frames and thus give more reliable signals for my forex trading strategies. This also means that I spend less time staring at charts and can also set alert notifications to let me know when price has reached certain levels or a particular indicator value has been reached.

The Detrended Price Oscillator is just one indicator amongst thousands. I would not build a trading system alone, but rather combine with other technical indicators such as moving averages, Parabolic SAR, Stochastic Oscillator, RSI, ADX and price action analysis.

Of course, every trading system will generate false signals which is why money management is so important. I would personally be implementing sensible money management and only take traders that give me a favorable risk to reward ratio, ideally of at least 1:3. This means that one losing trade does not wipe out consecutive winners.

The methods of implementing the Detrended Price Oscillator into a trading strategy that are outlined within this article are just ideas. I would always ensure that I have good money management, trading discipline and a trading plan when using any forex strategy.

Furthermore, I would combine multiple technical analysis, fundamental analysis, price action analysis and sentiment analysis to filter all entries. You should trade forex in a way that suits your own individual style, needs and goals.

If you would like to practice trading with the Detrended Price Oscillator, you can open an account with a forex broker and download a trading platform. If you are looking for a forex broker, you may wish to view my best forex brokers for some inspiration.

Happy trading!