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Trading with the awesome oscillator

The awesome oscillator is a technical indicator that is used within the financial markets to confirm or disprove trends on price charts. These charts compare current data to historic data with the aim of predicting momentum in the markets. This can also help to determine whether a current trend is bullish or bearish, and which is more likely to continue or reverse.

The indicator is a significant technical indicator for short-term trading strategies, such as day trading and scalping. The awesome oscillator is an important part of technical analysis, where reading price action on trading charts, which are most often candlestick charts, helps to identify buy signals and potential reversal points before a trader opens a position.

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What is the awesome oscillator?

The awesome oscillator is a type of technical indicator​​ that was invented by Bill Williams as a method for trading stocks, forex and commodities. He also developed the accelerator oscillator, which works in a similar way to the awesome oscillator. These days, the indicator can be used for all financial markets, including those mentioned above. Many timeframes can be used to set the awesome oscillator, whether this be minutes (extreme short-term), hours (short-term), days (medium-term) or months (long-term).

Awesome oscillator calculation

Our online trading platform calculates the awesome oscillator formula automatically when it is applied to a price chart; however, it is still useful to have knowledge of its raw formula. The awesome oscillator looks at the last five bars on a candlestick chart in comparison with the previous 34. The value is then calculated by the difference in simple moving average (SMA) over these two timeframes. The awesome oscillator formula is as follows:

Median price = (High price of a session + low price of a session) ÷ 2

Awesome oscillator = 5 period simple moving average (median price) – 34 period simple moving average (median price)

How to read the awesome oscillator

On many trading platforms, the awesome oscillator consists of green and red bars or lines. Green bars represent ‘ups’, where the awesome oscillator’s value is greater than the previous bar, and the red bars represent ‘downs’, where the value is lower than the previous bar. There is a zero line in the centre and the bars are plotted based on the calculation of the two moving averages. The below image is from our Next Generation trading platform, where green and red lines are outlined to show ups and downs on a price chart.

Traders can use signal lines to interpret which way the market is moving. If the awesome oscillator crosses above the zero line, this signals bullish momentum, but if it crosses below the zero line, this signals a bearish momentum. This can easily change, so the awesome oscillator aims to detect whether a trend is continuing or starting to reverse. The below chart shows how green lines indicate bullish momentum and red lines indicate bearish momentum on a price chart.

Awesome oscillator as a divergence indicator

The indicator can be used to measure both convergence and divergence of an asset’s price. Therefore, when a price makes a new high or new low, you should check whether the indicator is mirroring this process. If the indicator does not support the price action, then this may suggest that there is a trend reversal.

Remember that technical indicators can only predict market trend and strength, and cannot guarantee that the price will move in a certain direction. It may only be a temporary divergence, after which the price moves back in sync with the original trend. If you do see divergence on your trading chart, you may wish to wait for the colour of the awesome oscillator lines to change.

Accelerator oscillator vs awesome oscillator

The accelerator oscillator is another of Bill Williams’ technical indicators, which is calculated as the difference between the awesome oscillator and a 5-period simple moving average. This indicator was designed as a leading indicator to detect early changes in momentum. More specifically, it aims to forecast price changes through measuring acceleration or deceleration of current market momentum​. The accelerator oscillator is similar to the awesome oscillator in terms of appearance, with green representing an ‘up’ and red a ‘down’, although there are some important differences between the two.

For example, when the oscillator crosses above or below the zero line, this is not seen as a trading signal, but instead simply shows signs of bullishness or bearishness. The accelerator oscillator helps traders to detect positive and negative values in order not to enter trades that do not look promising. Traders are often advised not to buy if the last bar on the current chart is red, and not to sell if the last bar is green. This can help traders to make better judgements when entering and exiting volatile markets.

The accelerator oscillator is available along with the awesome oscillator on our MetaTrader 4 software​.

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How to use the awesome oscillator

In the financial markets, the awesome oscillator can be used to generate various trading signals, such as buy or sell signals. This is particularly useful for short-term trading strategies where traders look to enter and exit positions as quickly as possible.

A common awesome oscillator trading strategy is to use the zero-line crossover to interpret signals. As discussed, a bullish crossover occurs when the oscillator crosses above the line, whereas a bearish crossover occurs when the oscillator crosses below the line. These both suggest a possible reversal against the previous price trend. If an asset’s price decreases below the zero line, traders may be more likely to open a short position, instead of a long position, which may be more favourable when the price starts to increase to above the zero line.

Another popular awesome oscillator trading strategy is to look for bullish and bearish ‘saucers’ on price charts. These show rapid momentum changes in three or more bars at once that are either above or below the zero line. A bullish saucer occurs when the awesome oscillator is above the zero line and there are two red bars, the second being smaller than the first, which is followed by a green bar. A bearish saucer works the other way around, with two green bars below the zero line, the second being smaller than the first, followed by a red bar.

A saucer strategy can be used to define entry and exit points of a position, as the trader will be looking to buy an asset before the price rises. However, these buy and sell signals are not guaranteed to result in profit, and should be used in conjunction with other technical strategies to predict market trend strength and direction. Therefore, it is always a good idea to use risk management tools such as stop-loss orders on a position, in order to close out the position when your maximum capital loss is reached.

Awesome oscillator scalping strategy

Scalping​ is a strategy where traders take advantage of small and frequent price movements within volatile markets, with the aim of making a profit. Their positions tend to last for only a few seconds or minutes. When placing an awesome oscillator on your trading chart, you can adjust the timeframe to a much smaller period to reflect this scalping strategy. This helps to make the awesome oscillator an effective indicator for scalping, especially when combined with other indicators, such as Bollinger Bands. The oscillator can provide quick and precise trading signals for the scalper to enter and exit a trade within a matter of moments, giving them potential to profit from a bullish or bearish market. These are particularly rewarding within the forex market, when trading currency pairs.

MACD and awesome oscillator strategy

The moving average convergence divergence (MACD) indicator is similar to the awesome oscillator in that they both display market momentum of the current periods compared with previous periods, and both are used to provide signals for trend direction. An MACD and awesome oscillator strategy works by using the MACD indicator to identify entry and exit signals and confirming these signals with the AO, using a twin peaks strategy. Read more about MACD in trading.

Trade with the awesome oscillator on our platform

The awesome oscillator is available to use on our award-winning online trading platform, Next Generation. We offer a wide range of tradable assets to practise your awesome oscillator strategies, along with other momentum and trend indicators. Our price projection tools and drawing tools allow you to customise your charts in a way that displays your data clearly, so that price action is easier to read and interpret. Learn more about Next Generation’s charting features through our platform tutorials.

Awesome oscillator for MT4

You can also trade using the awesome oscillator on the international platform, MetaTrader 4. This software is easily accessible for those who are already familiar with the platform, and MT4 offers a number of other trading indicators and add-ons to download to your device. Open an MT4 account now to get started.