One of the popular indicators that are used to measure market momentum is the Awesome Oscillator (AO). The AO Indicator is also called as the super indicator due to the amazing results some traders have had using it. Let’s now learn more about this indicator.
What is Awesome Oscillator?
Introduced by Bill Williams, the Awesome Oscillator is an oscillator which is boundless. This means that AO is not range bound like from +100 to -100. The AO is basically a histogram that displays the market momentum of a recent number of periods when compared to the momentum of a larger number of previous periods.
This indicator is formed by the moving average crossover of two simple moving averages (SMAs), 34-period SMA and 5-period SMA. The 34-period SMA is subtracted from a 5-period SMA and both lines are built across the bars’ midpoints instead of closing or opening prices.
The value of AO fluctuate above and below the zero line and are shown as green and red bars. The red color means that the bar is lower than the previous one and the green color means that the bar is higher than the previous one.
The figure below shows the Awesome Oscillator.
Awesome Oscillator and Cross
The zero line cross is one of the easiest bullish and bearish signals of this indicator.
- Bullishness: It is considered bullish when the AO crosses above the zero line. This is because the short-term momentum would be rising faster than the long-term momentum.
- Bearishness: It is considered bearish when the AO crosses below the zero line. This is because the short-term momentum would be falling faster than the long-term momentum.
Awesome Oscillator and Twin Peaks
When two peaks happen consecutively, it is considered as a bearish or bullish signal.
- Bullishness: The twin peaks are said to be bullish in the following scenario – When both peaks are below the zero line, the second peak is higher than the first one and is followed by the green bar, and the gap (trough) between the peaks stays below the zero line.
- Bearishness: The twin peaks are said to be bearish in the following scenario – When both peaks are above the zero line, the second peak is lower than the first one and is followed by a red bar, and the gap (trough) between the peaks stays above the zero line.
Awesome Oscillator and Saucer
When the saucer happens, it is an early signal for trend forecasting. Saucer basically checks for changes in three consecutive bars that are on the same side of the Zero Line.
- Bullishness: When the AO is above the zero line and there are two consecutive red bars (second lower than first bar) followed by a green one, it is considered to be a bullish signal.
- Bearishness: When the AO is below the zero line and there are two consecutive green bars (second higher than first bar) followed by a red one, it is considered to be a bearish signal.
How Traders Use Awesome Oscillator
Traders use AO for entering and exiting trades based on bearish and bullish signals.
- When the AO crosses above the zero line
- When there are bullish twin peaks
- When there is bullish saucer
- When the AO crosses below the zero line
- When there are bearish twin peaks
- When there is bearish saucer
The figure below shows how to buy and sell using AO.