Trading with 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).

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)

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.

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.

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​.

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.

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.

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.