The Awesome Oscillator (AO) is one of a number of technical indicators developed by Bill Williams, a trader who approaches the markets on a psychological level. He incorporates chaos theory and human psychology with simple price action analysis to create his indicators and make trading decisions. This Williams indicator has been one of the more requested additions to our library.
In the case of the Awesome Oscillator, Williams created a momentum indicator that attempts to hone in on favorable setups by using different interpretations of widely accepted setup relationships, like when a fast moving average crosses over a slower one. Interaction between two different length moving averages, particularly crosses, have long been used to determine market shifts.
From a technical perspective, the AO is created by subtracting a 34 bar moving average from a 5 bar moving average, using a mean candle price for the moving averages instead of the more traditional close price. Each histogram bar is red if it’s below the previous bar, and green if it’s above.
Williams recognized several different formations within the Awesome Oscillator as indicative of market direction when using this oscillator in place of other similar momentum indicators, like a MACD. Like any technical analysis tool, the greatest value is seen combining multiple indicators and overlays to best identify opportunity.
There are three primary formations for identifying possible trading opportunities with the Awesome Oscillator.
Setup One: Cross
The first setup is a simple Cross over the zero line. When crossing from below to above, the market is showing a bullish indication. The inverse signal occurs when the AO crosses from above the zero line to below.
Setup Two: Saucer
The second setup is called a Saucer. This is basically a three bar pattern with the AO histogram bars. For a bullish setup, the 3 bars are all above the zero line. The second histogram bar will be below the first, with the third being above the second. Thus we look at this as a bit of a saucer shape, curving down and then back up, like so:
The same setup in reverse would be interpreted as bearish if the pattern takes place below the zero line.
Setup Three: Twin Peaks
The third setup is the Twin Peaks formation. The below image displays a bullish Twin Peaks formation: the histogram is below the zero line, makes a low point, recovers without crossing zero, and dips again. The second downside peak is less extreme than the first, and upward movement which eventually crosses zero follows it.
The longer term formation shown above indicates an overall momentum reversal, in this case showing a bear market making a turn. The same formation inverted above the zero line would indicate a momentum change from bullish to bearish.
Using the Awesome Oscillator
To try the Awesome Oscillator, simply open the Analysis menu on your chart and search the Analysis Tools for Awesome Oscillator. Clicking the item will add it to the bottom of your chart. You can also change the Fast and Slow moving averages, styles, and more from within the Analysis menu.
This content is not financial or investment advice, and is published for informational purposes only. Seek a duly licensed professional for financial or investment advice.