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The Awesome Oscillator Indicator (AO) by Bill Willams is an indicator showing the difference between two simple moving averages that helps to define moving strength of the market. Bill Williams developed this indicator on the basis of earlier existed MACD and made a number of changes. What these two indicators have in common is two simple moving averages.
But in contrast to MACD, the Awesome Oscillator is based on 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;
The Awesome Oscillator formula looks as below:
where:
SMA – Simple Moving Average;
Median Price – average price
The Awesome Oscillator moves around the zero point and represents a bar chart with red and green columns. If a column is below previous one, it is red and if a column is above the previous one, it is green (see img. 1)
Image 1. The example of the Awesome Oscillator
The Awesome Oscillator trading signals
The indicator is very simple in use and provides rather clear signals for entering the 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 buying. It consists of three columns of bar charts located above the zero point. Upon that, the middle column must be red, whereas right column must be green (see img.2) Though, traders usually consider the opposite position of “saucer” (it below zero) as signal for purchase, where the middle column is green, and the right one is red.
Image 2. Signal “Saucer” for buying
2. Signal "Zero Line Cross"
It is formed when the 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 (see img. 3)
Image 3. "Zero Line Cross" signal for sale
3. Signal "Twin Peaks"
When the 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 buying. If it is quite the opposite, it is a signal for sale (see img. 4)
Image 4. "Two Peaks" signal for sale
Two important rules are efficient for all signals:
1) A signal for buying will always be a green bar, and for sale it will be a red one. That is to say, the current (zero) column must also have a relevant color, and if prior to opening pending order a bar has an opposite color, the signal should be canceled.
2) A signal is only effective, when the bar has was already painted and cannot change color.
You also may be interested in:
Adaptive Stochastic Oscillator
