What is Awesome Oscillator? Here is the most ultimate guide to AO’s nature and use as a forex trading software. We gathered top 5 trading forex strategies using Awesome Oscillator.

Why is it called awesome?

Awesome Oscillator – sounds pretty nice, doesn’t it? What makes it so awesome?

Awesome Oscillator (AO) is an indicator created by Bill Williams and described by him in his book “New Trading Dimensions: How to Profit from Chaos in Stocks, Bonds, and Commodities”. Bill Williams called it “awesome” in order to distinguish from other complicated and dull tools like stochastic, moving average convergence divergence (MACD), relative strength index (RSI) etc.

What does an oscillator do?

The 2nd word in Awesome Oscillator is oscillator. The word “oscillator” comes from a Latin word oscillo meaning to swing, to swing one’s self.

An oscillator is a mathematical expression calculating momentum or speed of the price’s movement over time. It determines position of the price between two extreme values (high and low). The basic concept when using oscillators is to discover overbought and oversold situations. The market is considered to be overbought when the price is about the upper bound, and its further increase is improbable. The oversold zone is characterized by such a low price that at the moment its further recession is improbable.

AO Calculation

Awesome Oscillator Formula:
AO = SMA (5) (High+Low)/2) – SMA (34) (High+Low)/2

AO compares 2 simple moving averages: SMA (5) and SMA (34). SMA (5) is a 5-period simple moving average that accounts for a short-term move and is calculated as arithmetical average of median prices for the recent 5 bars. SMA (34) is a 34-period simple moving average that accounts for a long-term move and is calculated as arithmetical average of median prices for the recent 34 bars. Comparing a short and long periods is usual for many technical indicators.

AO Chart

Because of its oscillator’s nature, AO shows values fluctuating between positive and negative values or above and below a Zero Line. A positive values means the fast SMA is trading higher that the slow SMA, a negative value appears when the fast SMA is not more than the slow SMA. The calculated values are usually drawn as a histogram of red and green bars as its most usual format. A bar turns green when its value exceeds the value of the previous bar. A red bar appears when a bar is lower than the previous bar. Green does not necessarily mean positive and red does not surely mean negative. So the histogram may show green bars when AO is below zero but its values are growing.

awesome-oscillator-chart

AO Signals

There are 4 basic signals to sort out data provided by the Awesome Indicator. Here they are:

1. Zero Line Cross. When the AO value crosses above or below the Zero Line, it indicates a change in momentum. If AO goes from negative to positive territory this gives a chance to buy. If AO goes from positive to negative this gives a chance to sell. However, to be more specific crossing the Zero Line means a new 1st wave of a new trend is coming. In other words, zero line cross is a signal of the trend’s reversal.

awesome-oscillator-zero-line-cross

2. Divergence. Divergence happens on a chart when the price and its relevant indicator are moving in opposite directions. Divergence between the price and AO is a signal of the trend’s attenuation.

awesome-oscillator-divergence

3. Convergence. Convergence appears on a chart when the price and its relevant indicator are moving in the same directions. Convergence is opposite to divergence and may arise after the failed divergence. Convergence between the price and AO is a signal of the trend’s continuation.

awesome-oscillator-convergence

4. Correction Depth. Depth of correction of relevant lows in uptrend or highs in downtrend helps to distinguish a momentum move from a correction move. In up trend lows of AO reflect depth of correction waves (B or 4 or b/C etc). In down trend depth of correction is estimated by tops of AO.

awesome-oscillator-correction-depth

What is the main secret of AO?

Despite statements of Mr. Bill Williams that the Awesome Oscillator is his sole development within the strategy of chaos, in practice it is only a part of the truth. The only thing that was introduced by Williams in this tool is a convenient display of 2 moving averages in the form of a histogram. Have a look at the below chart:

awesome-oscillator-and-moving-averages

Do you notice coincidence between AO and 2 moving averages? In practice, AO histogram just illustrates simple crossing of 2 moving averages applicable to the median price! It doesn’t mean that the indicator is useless; on the contrary, understanding its way of interpretation allows us to find workable setups.

Top 5 Awesome Oscillator Trading Strategies

# 1 – AO Zero Line Cross Strategy

This is the simplest AO Trading Strategy:
Buy when AO crosses above the Zero Line.
Sell when AO crosses below the Zero Line.

If you use this strategy as it is, you may get quite a number of good entries if you catch a current trend. Bearing in mind the fact that trends take about 30% of price move only while the rest time price goes sideway, you will definitely lose if trading on this signal alone.

awesome-oscillator-zero-line-cross-strategy

# 2 – AO Saucer Strategy

AO Saucer Strategy defines rapid changes in momentum. It compares three consecutive bars, all three either positive or all three negative. All the 3 studied bars should be either above zero or below zero.

A Buy Saucer Setup:

  • AO is positive;
  • 2 previous bars of AO are red;
  • the 2nd red bar of AO is a little bit shorter than the 1st bar;
  • the 3rd bar of AO turns green and it is a signal bar; buy on the open of the next bar.

awesome-oscillator-saucer-strategy-buy-setup

A Sell Saucer Setup:

  • AO is negative;
  • 2 previous bars of AO are green;
  • the 2nd green bar of AO is shorter than the 1st bar;
  • the 3rd bar of AO turns red and it is a signal bar; buy on the open of the next bar.

awesome-oscillator-saucer-strategy-sell-setup

This strategy allows to jump into a current trend after a small pullback. However, this setup is too simple as well. It does not consider a trend’s direction, support and resistance lines and older time frames.

# 3 – AO Twin Peaks Strategy

Twin Peaks is a strategy that compares two peaks of AO on the same side of the Zero Line.

A Buy Twin Peaks Setup:

  • AO is negative;
  • there are 2 lows of AO and the 2nd low is higher than the 1st low, so we have divergence between the price and AO;
  • the next bar after the 2nd low turns green.

awesome-oscillator-twin-peaks-strategy-buy-setup

A Buy Twin Peaks setup appears when 2 lows of AO are below the Zero Line. The 2nd low is higher than the 1st low and followed by a green bar in AO.

A Sell Twin Peaks Setup:

  • AO is positive;
  • there are 2 highs of AO and the 2nd high is lower than the 1st high, so we have divergence between the price and AO;
  • the next bar after the 2nd low turns red.

awesome-oscillator-twin-peaks-strategy-sell-setup

A Sell Twin Peaks setup happens when 2 highs of AO are above the Zero Line. The 2nd high is lower than the 1st high and followed by a red bar on AO.

This is a reversal strategy. It helps to look for an early entry against the existing trend into a new trend at the very beginning.

#4 – AO Trendline Cross Strategy

This strategy allows to enter early in the trend reversal – prior to a Zero Line Cross signal.

A Buy AO Trendline Cross Setup:

  • AO is positive and made 2 highs;
  • draw a slope trendline connecting these 2 highs;
  • buy once a new bar on AO will break this slope trendline.

awesome-oscillator-trendline-cross-buy-setup

A Sell AO Trendline Cross Setup:

  • AO is negative and made 2 lows;
  • draw a slope trendline connecting these 2 highs;
  • buy once a new bar on AO will break this slope trendline.

awesome-oscillator-trendline-cross-sell-setup

When all the trading world waits for AO to cross its zero line as a signal of reversal, this pattern allows to jump in early in order to multiply your gains and reduce risks.

# 5 – AO Wave Strategy

You may know that Bill Williams used his Awesome Oscillator to determine the 1st wave of a new trend after the reversal.

We will use only its 2 main signals in our Wave Strategy:

1. Zero Line Cross shows us a new A wave against the previous trend.
There is a direct consequence from the first signal. The new A-wave may appear on several charts at the same current moment. It will belong to the oldest chart however.
2. Correction Depth. Depth of correction of relevant lows in uptrend or highs in downtrend helps to distinguish a momentum move from a correction move. In up trend lows of AO reflect depth of correction waves (B or 4 or b/C etc). In down trend depth of correction is estimated by tops of AO.
The reversal A wave should beat high or low of the previous B correction.

awesome-oscillator-wave-strategy

Frankly speaking, the Awesome Oscillator is a big part of our AO Wave Strategy; however, it is only its part. Besides, we use a modified linear view of the Awesome Oscillator. The full description of our Wave Strategy will be published at Mtradee.com. Our market analysis is featured at Market Analysis.

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