What is the Awesome Oscillator?

20 January 2021

    The Awesome Oscillator is an indicator proposed by Bill Williams, and it is used to determine the current market momentum, as well as to understand which of the bullish or bearish market forces prevail in the market at each moment. The Awesome Oscillator has been conceived as an improvement of other standard oscillators and it compares the recent market momentum with the general momentum over a wider frame of reference. It is composed of a histogram, plotted in a separate chart on the bottom of the main price chart.

     

    Awesome Oscillator Calculation

     

    The Awesome Oscillator indicator values are calculated using the following formulas

     

    AO = SMA(MEDIAN, 5) - SMA(MEDIAN,34)

     

    Where

     

    SMA is the simple moving average

    MEDIAN is the median price for each bar

     

    The calculated values are plotted as a histogram, and the color of each bar is determined by the difference between the current bar and the previous one. If the bar has a higher value than the previous one, then it’s color is green. If the bar has a lower value than the previous one, then it’s color is red.

     

    Awesome Oscillator in Fondex cTrader

     

    The Awesome Oscillator is always plotted in a separate chart below the main price chart. We can see an example of a plotted Awesome Oscillator indicator from Fondex cTrader below.

     

    Awesome Oscillator in Fondex cTrader

     

    To add an Awesome Oscillator indicator in Fondex cTrader, right-click on the chart and navigate to Indicators > Oscillators > Awesome Oscillator. After clicking on Awesome Oscillator, the below form will appear. 

     

    How to add an Awesome Oscillator indicator in Fondex cTrader

     

    In this form you can customize your line’s color thickness and type and press OK. The Awesome Oscillator indicator will be added on your chart.

     

    Awesome Oscillator Strategies

     

    Twin Peaks Strategy

     

    As any other oscillator, the Awesome Oscillator is good at identifying trend exhaustions and price reversals. Hence, the Twin Peaks Strategy, one of the most known strategies involving the Awesome Oscillator, has this exact purpose - to identify valid entry points based on possible price reversals. The main principle behind this strategy is to look for two peaks on each side of the indicator, positive and negative, which could indicate a price reversal. The basic rules to identify bearish and bullish signals using the Twin Peaks strategy are outlined below.

     

    Bullish Signal

     

    For the Twin Peaks Strategy to provide a bullish signal, the following conditions must be true

     

    1. Two peaks need to be formed below 0.
    2. The second peak needs to be higher than the first peak
    3. The second peak needs to be followed by a green bar

     

    In the screenshot below, we can see an example of a bullish twin peak

     

    An example of a bullish twin peak

     

    We can see on the chart the two successive peaks being formed below 0. After the second low peak, a green histogram bar appears, giving us the heads-up to enter a buy position. The subsequent price action confirms that the price has moved upwards, hence the signal provided a valid entry point.

     

    Bearish Signal

     

    For the Twin Peaks Strategy to provide a bearish signal, the following conditions must be true

     

    1. Two peaks need to be formed above 0.
    2. The second peak needs to be lower than the first peak
    3. The second peak needs to be followed by a red bar

     

    In the screenshot below, we can see an example of a bearish twin peak setup.

     

    An example of a bearish twin peak setup.

     

    On the chart, we can observe how the price for the EUR/CAD ranges after a short bullish trend. At some point, sellers seem to gain ground and a bearish twin setup is formed. The signal is valid since an extended selloff follows shortly after.

     

    A more conservative approach to the Twin Peaks Strategy is to combine it with current price action on the price chart and look for divergences e.g. a bullish twin peak and falling market price. This approach will provide you less, but more accurate signals

     

    Bullish and Bearish Saucer

     

    Even though the Awesome Indicator, as an oscillator, is mainly a price reversal indicator, there is a strategy that can be used to identify trends and a trend continuation strategy. It’s called the Bullish and Bearish Saucer Strategy and it is used to detect failed price reversals, hence the continuation of the current trend. The rules are simple and they are outlined below.

     

    Bullish Signal

     

    A bullish signal is identified when

     

    1. One or two red bars are printed above the zero line
    2. The red bars are followed by two green bars

     

    This pattern indicates that the price was about to reverse, but the reversal was rejected and the trend will probably continue to be bullish. An example on a chart can be found below

     

    Bullish Signal

     

    Bearish Signal

     

    A bearish signal is identified when

     

    1. One or two green bars are printed below the zero line
    2. The green bars are followed by two red bars

     

    Same as above, the bearish reversal did not happen and the trend seems to stay bearish. An example on a chart can be found below

     

    Bearish Signal

     

    Limitations of the Awesome Oscillator

     

    Awesome Oscillator, as any other technical indicator, always needs to be used in context. An out of context interpretation of Awesome Oscillator patterns can generate a lot of false signals that could lead to substantial losses. Therefore, when using the Awesome Oscillator, always consider the market fundamentals that currently move the market, and combine the signals with other confirmation signals, like trend indicators, support/resistance levels and the relevant price action taking place on the chart.

     


    *The products advertised are only available to clients under Fondex Limited Seychelles (SDL No: SD037).

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#Educational#indicator#Indicator#Oscillator