Detrended Price Oscillator
Tue, Apr 15The Detrended Price Oscillator (DPO) aims to eliminate trends from price data, making it simpler for traders to spot price cycles through their peaks and troughs. As suggested by its name, the DPO is a technical indicator that provides insights into an asset's price while disregarding prevailing price trends. It filters out cycles longer than the specified period for the indicator, focusing solely on shorter-term cycles. The DPO is shifted to the left to align with the price peaks and troughs. This approach is based on the idea that detrended prices can assist traders in understanding buying and selling pressures driven by short-term price fluctuations, without considering larger price movements.
How to Use the Detrended Price Oscillator (DPO)
The Detrended Price Oscillator (DPO) is utilized to identify cycles through its peaks and troughs. Traders can estimate cycles by counting the intervals between these peaks or troughs. Users are encouraged to experiment with both shorter and longer DPO settings to determine the most suitable configuration. A key assumption of the DPO is that long-term price trends consist of short-term price trends, and understanding long-term trends requires an analysis of short-term movements. Significant peaks and troughs in the DPO may signal potential reversals in the overall trend.
How to Calculate the Detrended Price Oscillator (DPO)
To calculate the Detrended Price Oscillator, you first need to define a time period that reflects a price trend. For instance, if prices consistently rise over a twenty-day span, you would use "20" as the trend period. Divide this number by two and add one to obtain a value n. Next, calculate the moving average of the asset's price n days prior to the specified period, and subtract this from the asset's closing price for that period. The resulting figure represents the DPO for that period. This calculation method ensures that while short-term price trends are incorporated into a DPO chart, longer-term trends are excluded.
DPO = Close (n/2 + 1 Periods ago) – n Period SMA
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