According to Williams, Awesome Oscillator, evaluating dynamics of the price movement − the most effective element in his trade system Profitunity.
Even if you not the fanatic of the wave market theory, it will be very useful to see accurately wave pieces in the market to enter the market after the termination of an old wave in an optimum point of the new.
Using the Awesome Oscillator, it is possible to make the analysis of the several time intervals before the moment of a possible turn.
The indicator has excellent visual completion and noncritical delay – the author considers that only on the wonderful AO oscillator it is possible to construct a full strategy.
So let’s begin.
Bill Williams considers that the price is the final result of the influence of all market factors, and therefore changes in the last turn.
Before the price, the Momentum has to react – its speed, and change of trade volume act as the main reason for price dynamics.
The Awesome Oscillator indicator measures the Momentum of five last bars and this value compares to the Momentum of the last 34 bars, which is trying to analyze short-term market moods in long-term tendencies.
It gives the chance not only for an optimum first entrance, but also a possibility of further increase of a position on the developing trend.
The Awesome Oscillator indicator calculates a difference of the prices of slow SMA (MedianPrice, 34) and fast SMA (MedianPrice, 5).
This difference is considered the assessment of driving force of the market and is brought to the resultant histogram.
The indicator is similar to MACD, but its dynamics are considered more rounded due to use of the average price instead of the traditional price of the closing, and signals – earlier.
The histogram fluctuates near the zero line, but unlike MACD, has no signal line.
Awesome Oscillator is included in the standard package of all popular trading platforms, by default the histogram has the red-green color scale and is shown in an additional window, in parameters it is possible to change the thickness of columns and to add additional levels.
The green column of the histogram is formed if the current bar is higher than previous, red – if below.
The basic periods of calculation of moving averages aren't recommended to be changed (curious can try options − (7; 24), (10; 36)), but Williams claims that these parameters are optimum for the full analysis of the market.
The visual presentation of results of calculation in the form of the histogram allows controlling not only the behavior of the indicator concerning the line of balance, but also to see in time divergence situations with the price.
Completely created (closed) bar which color does not change anymore is considered a signal.
The color of the key bar for an entrance on a trend shall correspond to the direction of the transaction: purchase – green, sale − red.
The color of the key bar before a turn shall be opposite color, that is, for example, before a bull turn the indicator shall be red – the transaction can already be opened, but such input is considered riskier.
When the Momentum of the market changes, the indicator shall be colored in green color through 3-4 bars is and there will be a point for the second entrance in the new market.
As well as the normal oscillator, Awesome Oscillator allows estimating a condition of overbought / oversold.
If the trade signal completely corresponds to conditions, but the color of the histogram changed –we do not take such signal in hand!
The indicator gives trade signals on several standard patterns.
Let’s look at it in detail:
The model means the soft transformation of driving force of the market in the direction of growth or falling.
«Breakthrough of zero level»
The model reminds a divergence – with its help we look for the first signs of a turn on the flat market sections: the weakening of the force of bears before purchase and bulls – before sale.
The signal shall appear earlier than there will be an intersection of zero level.
The histogram shall be above zero − for the search of a point of opening of the SELL transaction, and below zero − points of the opening of the BUY transaction.
StopLoss – above/below the average bar of the model.
The model is rather difficult to the identification, it can lead to false entrances, therefore, it demands confirmation from other tools.
If within the model the histogram crosses the zero line – the trade signal is canceled!
The divergence of the line of the indicator with the price is traditionally considered strong signals: at bull divergence − we look for an entry point in SELL, at bear – an entry point in BUY.
The author recommends using a linking of Awesome Oscillator+Accelerator Decelerator Oscillator: the AC indicator shows the trend speed, the AO indicator − its dynamics. (Using Indicators)
As the example of a complex system, the Parabolic SAR indicator can be added to this scheme – it will define a medium-term tendency of the market and will show levels for the optimum StopLoss installation.
Such strategy demands a strong trend (we look at Parabolic!), because it gives many false signals on the flat sites.
It all comes down to this:
Awesome Oscillator is most effective complete with other indicators of Williams.
The AO indicator badly reacts to market noise, but at the same time not bad compensates the speculative price throws dangerous to other oscillators.
The main advantage of the AO indicator can be considered lack of redrawing and universality – it has been developed for the stock and future market, but has perfectly proved also on currency assets.
Complexity in identifications of graphic models and delay of signals is especially noticeable during the periods below H1, therefore, Awesome Oscillator isn't recommended to scalpers, but it has to be obligatory in an arsenal of medium-term traders.
As you can see, backtesting is quite simple activity in case if you have the right backtesting tools.
The testing of this strategy was arranged in Forex Tester 3 with the historical data that comes along with the program.
To check this (or any other) strategy’s performance you can download Forex Tester 3 for free. In addition, you will receive 16 years of free historical data (easily downloadable straight from the software).
Share your personal experience of the effective use of the indicator Awesome Oscillator. Tell us either this article was useful for you.