Deep Dive into Awesome Oscillator
Hello Skyrexians!
We continue our series of educational materials. Today it’s time to look at the Awesome Oscillator, an indicator introduced by Bill Williams in his book Trading Chaos. This can be very useful in your cryptocurrency trading. This indicator is used in many cryptocurrency trading strategies. You can combine it with other indicators to create your own cryptocurrency trading algorithm, trading bot, or manual cryptocurrency trading strategy. Most of the top crypto traders and top cryptocurrency trading platforms use it in their automated cryptocurrency trading. If you know you are trading with Awesome Oscillator, you will be able to improve your automated trading bot, manual trading strategy, or set up a grid trading bot more effectively. We think there are enough arguments to learn how to use this indicator. Let’s begin our deep dive!
What is Awesome Oscillator?
The Awesome Oscillator (AO) is a momentum indicator used in technical analysis to measure the strength and direction of a market trend. It was created by Bill Williams and is designed to help traders identify potential trend reversals or continuations.
Key features of Awesome Oscillator:
- Pulse measurement: AO measures the difference between the short-term and long-term moving averages using the midpoints of each candle rather than the closing prices. This gives an idea of the market dynamics.
- Histogram view: The indicator is usually displayed as a histogram, the bars of which fluctuate above and below the zero line. Green bars represent increasing momentum (bullish), while red bars indicate decreasing momentum (bearish).
Awesome Oscillator is calculated using a simple moving average (SMA) as follows:
AO = SMA (5 periods) − SMA (34 periods)
Now let’s look at the signals that Awesome Oscillator can produce using examples.
Buy signal “Plate”
The “Plate” buy signal should be generated only above the zero line. It’s very simple. Let’s wait until the sequence of Awesome Oscillator bars shown on the chart is formed.
As we can see, it consists of 3 bars. Beats 1 and 3 must be higher than beat 2. If we have such a sequence, then the activation signal is above the high of the price bar, which corresponds to AO bar 3. If the price breaks through this high, then the signals are active. Here we also have a very important thing. When this signal is activated, the price should be above the red Alligator line and the last upward fractal will be broken. In the chart below you can see an example of a successful “plate” signal.
Buy signal “Crossing the zero line”
This type of long signal only requires two candles on the Awesome Oscillator histogram. The first one should be below the zero line, and the next one should be above it. This signal means a high probability of a transition from a bearish trend to a bullish one. In the graph below you can see this sequence of bars.
Let’s move on to the example in the price chart below. We see that the price has broken through the fractal level. From this moment you can expect a signal to buy JSC “Crossing the zero line”. After this, we see that the signal has formed and we need to wait for the high of the signal candle to break through to enter a long position.
Buy signal “Double bottom”
The last buy signal is a double bottom on the Awesome Oscillator. It is necessary to wait for the formation of the first bottom below the zero line. After this, the AO bars should not cross the zero line, but for the second one is low, as you can see in the graph below. The confirmation column is the first green column after the second bottom has been formed.
On the chart below you can see an example of the execution of this signal.
Conclusion
The Awesome Oscillator is a momentum-based indicator designed to help traders identify changes in market momentum and potential trend reversals. By analyzing the difference between short-term and long-term momentum, AO provides valuable insight into the strength and direction of price movements, allowing traders to make more informed trading decisions.
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