Awesome Oscillator

The Awesome Oscillator (AO) is a tool that helps traders understand market momentum. Created by Bill Williams, it's used in various markets like stocks, forex, and crypto. The AO compares recent price action to past data to show whether momentum is building or fading. This helps you decide if a trend is likely to continue or reverse.

*Don't worry if you don't understand the screenshots completely. You will undestand more as you keep learning this guide. For now, all you need is to understand how indicators work, and how they help in trading.

How is the Awesome Oscillator Calculated?

The Awesome Oscillator uses two simple moving averages (SMA):

• 5-period SMA of the median price (average of high and low).

• 34-period SMA of the median price.

Formula:

javaCopy codeAO = 5-period SMA (Median Price) – 34-period SMA (Median Price)

(don't worry, you don't have to remember the formula).

The AO is plotted as bars above and below a zero line:

• Green bars mean the AO is increasing.

• Red bars mean the AO is decreasing.

How to Read the Awesome Oscillator

• Zero Line Crossover:

  • Above Zero: Indicates bullish momentum.

  • Below Zero: Indicates bearish momentum.

• Divergence:

  • If the price makes a new high but the AO doesn't, it may signal a trend reversal.

  • Similarly, if the price makes a new low but the AO doesn't, it could indicate a potential reversal to the upside.

Using the Awesome Oscillator in Trading

Zero Line Crossovers:

• Buy Signal: When the AO crosses above the zero line.

• Sell Signal: When the AO crosses below the zero line.

*The design and the interface of your platform doesn't have to be the same as here. That's fine.

Saucer Strategy:

• Bullish Saucer: Two red bars followed by a green bar above zero.

• Bearish Saucer: Two green bars followed by a red bar below zero.

Use these patterns to enter trades in the direction of the saucer.

Scalping:

• Adjust the AO to a shorter timeframe.

• Combine with other indicators like Bollinger Bands for quick entry and exit points.

MACD and AO Strategy (optional):

• Use MACD to find entry points.

• Confirm signals with the AO to increase accuracy.

Practice Exercise

Put your knowledge to the test with this exercise:

1. Set Up the Awesome Oscillator:

   • Open your trading/backtesting platform (e.g., TradingView or MetaTrader 5). You can choose any asset to trade. It doesn't matter for now.
   • Add the Awesome Oscillator to your chart.

2. Identify Signals:

   • Look for zero line crossovers.

   • Spot bullish and bearish saucers, using Zero Line Crossovers and Saucer Strategy.

   • Try to make some demo trades.

3. Analyze Your Trades:

   • Note how often the signals lead to profitable trades.

   • Adjust your strategy based on what you learn.

If you are new to trading, first exercises may be the hardest and taking the most time to complete. Once you get used to it and get some practice, it will get easier. So please don't skip them!