Awesome Oscillator is developed by famous technical analyst and charting enthusiast Bill Williams. Awesome Oscillator (AO) is an indicator that is non-limiting oscillator, providing insight into the weakness or the strength of a stock. The Awesome Oscillator is used to measure market momentum and to affirm trends or to anticipate possible reversals. It does this by effectively comparing the recent market momentum, with the general momentum over a wider frame of reference.
The Awesome Oscillator (UO) is useful for technical analysis because it takes more standard momentum oscillators and adjusts the calculation in order to strengthen a common weakness among them. However, it really becomes most effective when confirming signals or conditions is identified by additional technical analysis.Construction of Awesome Oscillator
Understanding the underlying formula used for construction of Awesome Oscillator helps traders take prudent decisions while trading in complex scenarios. Calculating the indicator is no longer required as charting platforms and trading software do it for us.
However, knowing how the indicator is calculated will help one better understand the indicator and its strengths and weaknesses. Awesome Oscillator indicator is calculated using the following formula:
The Awesome Oscillator is available on most trading platforms, such as Tradingview and MetaTrader. The indicator is also available on many free online charting sites, such as Investing.com, StockCharts.com and Yahoo! Finance.Working of Awesome Oscillator
• The basic principles are the same as with other histograms. The cross of the zero level up indicated the upcoming trend and the cross of the zero level down, the possible reversal to the downtrend.
• Like all technical indicators, it is important to use the AO in conjunction with other technical analysis tools.
1 Twin Peaks
Twin Peaks is a method which considers the differences between two peaks on the same side of the Zero Line. A Bullish Twin Peaks setup occurs when there are two peaks below the Zero Line. The second peak is higher than the first peak and followed by a green bar. Also, very importantly, the trough between the two peaks must remain below the Zero Line the entire time. This is a basic strategy, which looks for a double bottom in the awesome oscillator. This trading technique is much alike trading bullish divergence on histogram below Zero Line.Bullish Twin Peaks Conditions
• The histogram after the second low is green
Bearish Twin Peaks Conditions
• The histogram after the second peak is red2. Crossing Zero Line
When AO crosses below the Zero Line, the short-term momentum is now falling faster than the long-term momentum. This can present a bearish selling opportunity.
3. Saucer StrategyThe saucer strategy received its name because it resembles that of a saucer. The setup consists of three histograms for both long and short entries.
Long Setup Conditions• Awesome Oscillator is above 0
• A trader buys the fourth candlestick on the openShort Setup Conditions
• Trader shorts the fourth candlestick on the openConclusion
• AO calculates the difference of a 34 Period and five Period Simple Moving Averages.
The author is Head - Technical & Derivative Research, Narnolia Financial AdvisorsDisclaimer: The views and investment tips expressed by investment experts on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions.