Awesome Oscillator

The Awesome Oscillator (AO) is a technical indicator developed by Bill Williams to assess momentum. It measures the difference between a 34-period and a 5-period Simple Moving Average. Instead of using closing prices, the Simple Moving Averages are calculated based on the midpoints of each bar. The Awesome Oscillator is typically employed to validate trends and predict potential reversals.

Here are three methods to utilize the Awesome Oscillator:

Zero Line

When the Awesome Oscillator is below the zero line and forms a peak, it signals a short position. Conversely, if the Awesome Oscillator is above the zero line and creates a gap, it indicates a long position.

Twin Peaks

The Twin Peaks method analyzes the differences between two peaks on the same side of the zero line. If the Awesome Oscillator produces two peaks above the zero line, with the second peak lower than the first, it suggests a short position. The trough between the peaks must stay above the zero line throughout the setup. On the other hand, if the Awesome Oscillator shows two lows below the zero line, with the second low higher than the first, it indicates a long position. The trough between the two lows must remain below the zero line during this time.

Crossing the Zero Line

A change in momentum is indicated when the AO value crosses above or below the zero line. A downward cross from above suggests a short position, while an upward cross from below indicates a long position.

The Awesome Oscillator generates three types of trading signals:

1. Saucer

A Saucer Setup identifies rapid momentum changes. This method looks for three consecutive bars on the same side of the zero line. A Bullish Saucer setup occurs when the AO is above the zero line, featuring two consecutive red bars (with the second bar lower than the first) followed by a green bar. A Bearish Saucer setup happens when the AO is below the zero line, consisting of two consecutive green bars (with the second bar higher than the first) followed by a red bar.

2. Nought Line Cross

A Buy signal is generated when the histogram crosses the naught line upward, changing from negative to positive values. A Sell signal would occur with the opposite pattern.

3. Two Pikes

A Buy signal is indicated when the indicator forms two consecutive pikes below the naught line, with the later pike closer to the zero level than the earlier one. A Sell signal would be indicated by the reverse formation.

The Awesome Oscillator is calculated as a 34-period simple moving average plotted through the central points of the bars (H+L)/2, subtracted from the 5-period simple moving average, also graphed across the central points of the bars (H+L)/2.

MEDIAN PRICE = (HIGH+LOW)/2

Awesome Oscillator = SMA(MEDIAN PRICE, 5) - SMA(MEDIAN PRICE, 34

Where:

SMA = Simple Moving Average.