Awesome Oscillator

Awesome Oscillator (AO) by Bill Willams is an indicator showing the difference between two simple moving averages that assists in defining moving strength of market. Author developed this indicator on the basis of earlier existed MACD and brought a number of changes. As in case with MACD, two simple moving averages are used.

But in contrast to MACD, Awesome Oscillator  is built as the difference between simple moving averages with periods 5 and 34 and application of Median Prices (ie an arithmetic average between High and Low of bar/candle) instead of Close prices of candles.

Measurement

where:

High — High of present bar;
Low  — Low of present bar;

Thus, Awesome Oscillator formula looks as below:

where:

SMA – Simple Moving Average;

Median Price – average price

Awesome Oscillator moves around zero point and represents bar chart from red or green columns. If column is below previous one, it is painted red and it is painted green if column is above the previous one (watch pic. 1)

Picture 1. Example of Awesome Oscillator

Trading signals by Awesome Oscillator

The indicator is very simple in use and provides rather clear signals for entering market, though for a more successful trading it is better to use additional methods of technical analysis to confirm those signals. For example, Bill Williams uses Fractals.

1. Signal "Saucer"

Traditionally this is a signal for purchase and consists of three columns of bar charts located above zero point. Upon that, middle column must be red, whereas right column must be green (watch pic.2) Though, traders usually consider the opposite position of “saucer” (it below zero) as signal for purchase, where middle column is green, and right is red.

Picture 2. Signal “Saucer”for purchase

2. Signal "Zero Line Cross"

Is formed when zero point is crossed. If transformation is conducted from bottom to top (upon that, both columns are green), it is a buying signal. If it is bottom-to-top movement (upon that, both columns are red), - it is a signal for sale (watch pic. 3)

Picture 3. "Zero Line Cross" signal for sale

3. Signal "Twin Peaks"

When indicator's bars are lower zero and draw the second Low in succession, which is above the previous (that is to say, closer to zero), it is considered as signal for purchase. If it is quite the opposite, signal for sale occurs (watch pic. 4).

 

Picture 4. "Two Peaks" signal for sale

Two important rules are efficient for all signals:

1) Signal for purchase will always be a green bar, and for sales – a red bar. That is to say, current (zero) column must also have a relevant color, and if prior to opening pending order a bar of opposite color is painted, the signal shall be canceled.

2) Signal is only effective, when bar was already painted and cannot change color.