What is the Awesome Oscillator?
The Awesome Oscillator (AO), developed by Bill Williams, is a momentum oscillator designed to identify shifts in momentum. Unlike many oscillators that rely on price closing values, the AO uses a moving average of price bars. This makes it more responsive to price changes and potentially provides earlier signals. It's a visually distinct indicator, often displayed as two horizontal lines fluctuating around a zero line, making it easy to interpret.
How it Works
The AO is calculated using a double exponential moving average (DEMA) of price. Specifically, it's the difference between a 34-period and a 5-period DEMA. The DEMA gives more weight to recent prices, enhancing sensitivity. When the AO crosses above zero, it suggests bullish momentum; below zero indicates bearish momentum. The height of the bars represents the strength of the momentum.
Trading Signals
Buy signals are generated when the AO crosses above the zero line, or when it forms a bullish divergence (price makes lower lows, but AO makes higher lows). Sell signals occur when the AO crosses below the zero line, or when a bearish divergence appears (price makes higher highs, but AO makes lower highs). Look for confirmation from other indicators.
Basic Settings
The default settings are 34 periods for the longer DEMA and 5 periods for the shorter DEMA. While these are common, traders can adjust these periods to suit their trading style and the specific asset being analyzed. Shorter periods increase sensitivity, while longer periods smooth out the indicator. Experimentation is key. This is for educational purposes only, not financial advice.