Awesome Oscillator Study

By Samantha Baltodano

TL;DR:

The Awesome Oscillator (AO) is a momentum indicator that compares a 5-day Simple Moving Average (SMA) to a 34-day SMA to predict potential market reversals. It is displayed as a histogram and uses the midpoint value to better track volatility. There are three main trading strategies used with the AO: zero-line crossover, twin peaks, and saucer. It is best used in conjunction with other technical indicators and fundamental analysis.

What Is the Awesome Oscillator Study?

The Awesome Oscillator (AO) is a popular oscillator indicator used to measure momentum in the market, or, in other words, the speed at which a security’s price is changing. 

Because of its nature as an oscillator, The Awesome Oscillator is designed to have values that fluctuate above and below a Zero Line and is displayed as a histogram of the average of two Simple Moving Average (SMAs), one covering recent momentum and the other a longer period in the market. 

Traders often use the AO with other indicators to confirm bullish and bearish trends and predict possible reversals. Keep reading to learn more about how the AO indicator works and how best to employ it in your own trading strategies.

How Does The Awesome Oscillator Work?

The AO was developed as a simple way to measure market momentum and identify potential reversals. It does so by comparing a 34-day SMA from a 5-day SMA.

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NOTE: The Simple Moving Average is determined by adding together the median price of each day in the period and dividing it by the total number of days in that period. This is a slight variation of the default Simple Moving Average calculation which uses the closing price of each day.

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Price movements are then plotted on the histogram in accordance to the two SMAs according to the comparison of two simple moving averages.

When the 5-day SMA is greater than the 34-day SMA, the value generated in the histogram is above the zero line and a bullish market is indicated.

When the 34-day SMA is greater than the 34-day SMA and the histogram’s value sits below the zero line, the short-term average is less than the long-term average and a bearish market is indicated.

The general market momentum, as indicated by the AO, is represented by the color of each histogram bar. Each bar represents a single day and will be green if higher than the previous day’s average and red if lower.

What Is The Awesome Oscillator Formula?

Most trading software can display the awesome oscillator at the click of a button, but it’s useful to know how the indicator is derived. Below is the formula for the AO:

One period = 5 day SMA – 34 day SMA

Again, the SMA is calculated by adding together the median price of each day and dividing the total by the number of days in the period. Any time period can be used when calculating the awesome oscillator, but most traders use a daily SMA of 34 days and 5 days.

Again, it’s important to note the indicator uses the midpoint value rather than the day’s closing price, which can better track volatility.

Awesome Oscillator Trading Strategies

Traders typically use three main strategies to identify opportunities with the AO: the zero-line crossover, the twin peaks, and the saucer.

Zero-line Crossover

This strategy is based on watching for moments where the AO crosses over or under the zero line. 

When the AO crosses above the zero-line, short term momentum is increasing faster than long term momentum (short term SMA is greater than the long term SMA), and traders are prompted to enter a long position.

When the indicator crosses the zero-line from positive to negative territory, short-term momentum is decreasing more rapidly than the long-term momentum (long term SMA is greater than short term SMA), and traders may be prompted to enter a short position.

However, this strategy is far from fool-proof and should be used in conjunction with other technical indicators and fundamental analysis.

Source: Forex.com

Twin Peaks

This strategy identifies market reversals by examining the difference between two peaks on the same side of the zero line. This setup can occur as both bullish and bearish.

Bullish twin peaks occur when there are two peaks in momentum below the zero line, that is the second peak is closer to the zero line than the first peak. 

For this pattern to occur, the Awesome Oscillator must stay below the zero line during the formation of both peaks and the next histogram bar after the second peak must also be green, showing continued bullish momentum.

Source: Forex.com

Figure 2: Bullish Twin Peaks

Bearish twin peaks occur when the inverse conditions are met. Both peaks must occur in momentum above the zero line with the second peak lower – or closer to the zero line – than the first. 

You should also look for the next histogram bar after the second peak to be red, ensuring the second peak has formed and is not continuing to grow.

Saucer

The saucer strategy focuses on identifying movement in three consecutive days on the same side of the zero line.

A bullish saucer is identified when the AO is above the zero line and three histograms go in order as one red bar, a second red bar lower than the first, and a green bar immediately after. This formation resembles a small saucer-shaped dip in the overall histogram.

When a bullish saucer is identified, traders might enter a buy position during the third (green) bar or during the fourth bar provided it is also green.

A bearish saucer occurs below the zero line and is made up of two consecutive green bars, the second lower than the first, followed by a red bar. Traders might open a short position during the third bar or after the fourth forms, provided it is also red.

Source: Bearish Saucer

Figure 3: Bearish Saucer

These strategies work best when used in conjunction with other technical and fundamental analysis. A popular technical analysis indicator used with the awesome oscillator is the Moving Average Convergence Divergence (MACD) indicator.

Awesome Oscillator vs MACD

Both the Awesome Oscillator and MACD use moving averages to determine market momentum, but they track these averages in different ways.

Learning how to analyze both indicators and understanding the significance one has on the other can help you identify and confirm the best times to enter and exit a trade.

MACD shows the relationship between two moving averages, often a 12-day and 29-day Exponential Moving Average (EMA), of a security’s price. 

The EMA used by MACD reacts quicker to fluctuations in a security’s price than the SMA used by the AO. When used together, you can identify possible opportunities to go long or short with MACD and confirm them with the AO.

Summary

• The Awesome Oscillator (AO) is an oscillator indicator used to measure market momentum and predict potential reversals
• It is calculated by comparing a 34-day Simple Moving Average (SMA) to a 5-day SMA, and is displayed as a histogram
• When the 5-day SMA is greater than the 34-day SMA, the histogram value is above the zero line and indicates a bullish market
• When the 34-day SMA is greater than the 5-day SMA, the histogram value is below the zero line and indicates a bearish market
• The AO uses the midpoint value (median price) rather than the closing price to better track volatility
• There are three main trading strategies used with the AO: zero-line crossover, twin peaks, and saucer
• The AO should be used in conjunction with other technical indicators and fundamental analysis.

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