Awesome Oscillator Indicator - What Is It & How Does It Work?

2024.08.14 2024.08.14 Awesome Oscillator Indicator - What Is It & How Does It Work?

Oleg Tkachenkohttps://www.litefinance.org/blog/authors/oleg-tkachenko/

The Bill Williams Awesome Oscillator is a standard indicator used in intraday strategies as a trend confirming oscillator. It helps to estimate the strength of price impulse and predict the moment of potential price reversal.

The Awesome Oscillator indicator gives clear and easily interpretable signals that can be used on M30-H1 time frames. Such modified tools as Accelerator Oscillator, AO Zotik, and others are developed on its basis. This article explains how to use the Awesome Oscillator indicator.

What is the Awesome Oscillator?

The Awesome Oscillator is a classic basic indicator developed by the famous American trader Bill Williams. Some platforms list the developer's indicators in a separate group.

Despite its attractive name, the oscillator differs little from the well-known MACD. Below are instructions on plotting it on the trading asset's chart.

The indicator is based on convergence-divergence of moving averages. The value of a 34-period slow moving average is subtracted from the value of the 5-period fast moving average.

During moderate volatility in the market, the Awesome Oscillator belongs to the category of leading oscillators, while during high volatility - to lagging ones. On the chart, it is located in a separate window below the price and represents a histogram. The histogram consists of bars of two colors, red and green, moving relative to the central zero horizontal line. The stronger the trend and the greater the divergence between the MAs, the larger the upward bars in uptrends and the downward bars in downtrends.

The main signals are generated by the position of the bars relative to the middle line, its crossings, and their position relative to each other. Green bars indicate that the indicator's value is growing, and the red bars point to falling values. If the bars are growing and the histogram is above the zero line, it means that there is an upward market impulse. The histogram should be in the negative zone below the zero line in a downtrend.

The indicator has proven itself in all financial markets despite being originally created for stock trading. Today, it is mainly used in currency market trading strategies as an additional tool that filters the signals of trend indicators.

How the Awesome Oscillator Works

• If the indicator crosses the zero horizontal line from below or above, it points to a possible trend reversal or an end of a sideways movement;

• If the indicator values increase along with each subsequent bar rising, it suggests a strong market impulse;

  Fundamentally, the Awesome Oscillator delves into the disparity between a 34-period and a 5-period simple moving average (SMA) derived from the midpoint of the candlesticks (High + Low)/2. 

• If the indicator is at the peak or trough, a trend reversal is very likely. The higher the extremum is compared to the average values, the more likely it is that the downtrend will reverse and vice versa;

• If the indicator's bars change color, but there is no clear upward or downward movement, there is uncertainty and a flat market. There are no buy and sell signals.

After you have practiced using the oscillator on a demo account, perhaps you will be able to identify other Awesome Indicator signals, as well as other ways to use it. Please share them in the comments.

Awesome Oscillator vs MACD

The Awesome Oscillator is compared to MACD in many sources. They both belong to oscillators and help to gauge price momentum in the Forex market.

Common features:

• Both technical analysis tools are used to determine short-term momentum of a trend and the moment of its reversal;

• Generate signals for trading in the currency market when crossing the zero line;

• Calculation is based on moving averages;

• There are no overbought and oversold levels as in other oscillators;

• The indicator is displayed as a histogram.

Differences:

• The AO is based on the difference of median prices; MACD uses closing prices and exponential moving averages;

• On some platforms, the AO has only two settings. On the MT4 platform, there are none of them at all. The basic 5-period and 34-period MAs are used without adjustments; 

• MACD has three settings and can be adjusted. The AO cannot be tuned;

• A signal line and a MACD line are used as additional filters and signal tools. The AO has none of these.

On the chart, the Bill Williams Awesome Oscillator looks almost the same as the well-known MACD.

In practice, the MACD indicator appears to be more functional and faster. For example, the OsMA indicator was developed on its basis, which measures the difference between MACD and its signal line. In addition, tests reveal that both indicators have their advantages and disadvantages. Therefore, they can be used to filter each other's signals.

Awesome Oscillator vs Accelerator Oscillator  

The Accelerator Oscillator is another indicator designed by Bill Williams on the basis of the Awesome Oscillator. This indicator also measures market momentum.

Accelerator Oscillator = AO - SMA5 (AO), where the last five values of the Awesome Oscillator are averaged using the arithmetic mean formula, and the result is subtracted from the last AO value.

The Accelerator Oscillator shows acceleration or deceleration of the current market movement. It is used to evaluate the strength of trend movements.

Both indicators are displayed as a histogram. The upper chart is the Awesome Oscillator, the lower one is the Accelerator Oscillator.

The AO is more often used to determine the general trend direction, while the AC is used to detect changes in the momentum and can serve as an early warning of possible trend reversals. Another difference is that the Accelerator Oscillator can give signals earlier.

How To Calculate Awesome Oscillator  

The AO indicator uses the following formula:

AO = SMA (Median Price, 5) - SMA (Median Price, 34), where:

• SMA – a simple moving average is calculated as the arithmetic mean of prices for the specified time frame;

• Median Price (Average Price) = (High + Low) / 2, where High is the maximum candlestick price (the extreme point of the upper shadow), Low is the minimum one (the extreme point of the lower shadow);

• 5 and 34 are periods of moving averages. For example, a period of 5 means that the last 5 candlesticks of the selected time frame are taken into account.

On the MT4 and MT5 platforms, the technical indicator settings are embedded in the code and cannot be changed. On LiteFinance's web platform, the values of fast and slow moving averages can be adjusted to the volatility of each asset or market situation.

How To Read The Awesome Oscillator

The Awesome Oscillator formula uses the divergence between a fast 5-period moving average and a slow 34-period moving average.

The period of a moving average is its property to change its value faster or slower with the change in price value. For example, a fast 2-period moving average will have the value (10+20) / 2 = 15 USD in two candlesticks when the price rises to 20 USD from 10 USD. A slow 4-period moving average at prices of 8, 9, 10, and 20 USD will show the value (8+9+10+20) / 4 = 11.75 USD. When the price moves sharply upward from 10 USD to 20 USD, the 2-period moving average responds faster to a price change.

The Awesome Oscillator determines the trend direction using the principle described above. The greater the divergence between the two moving averages, the stronger the trend. The upward growth of green bars indicates a strong upward movement, and the signal is taken into account when the bars cross the zero line. If the red bars increase, a downward trend unfolds.

Now, let's find out how to use the Awesome Oscillator in live trading, putting it to work with a real-life example.

The image above displays that a trend signal is formed when the indicator shows strong movement in the opposite zone and crosses the zero line:

• The indicator’s first section on the left shows small red and green bars above the zero line, pointing to no strong price movement. Therefore, the downtrend ended quickly. The AO Awesome Oscillator signal turned out to be a lagging one;

• After that, the AO values increased, indicating an upward movement by crossing the zero line. The green bars (columns) appeared. The third candlestick (vertical dotted line) offered an entry point into a long position.

In this case, the indicator generated a false signal. The green bars forming above the zero line did not signal the uptrend continuation.

How To Use The Awesome Oscillator  

Here are some tips for trading in the currency market using the indicator:

• Compare the current values of the indicator with the previous ones. If the indicator deviates from the zero line more than usual, the probability of a price reversal increases;

• Monitor the size of the bars. A sharp increase in the size of the bars indicates an increase in the trend impulse;

• Observe the color of the bars. If three bars of different color appear and their size increases, a new trend may start.

At the default settings, the indicator determines short-term impulses, so it is recommended to use it in short-term strategies with holding a trade in the market up to 5-10 candlesticks after the received signal.

Awesome Oscillator Trading Strategies  

In trading strategies, the Awesome Oscillator confirms other trend indicators’ signals.

Example:

• 1 – the EUR/USD trading instrument chart (D1 time frame) shows the crossover of moving averages. The fast SMA9 crosses the slow SMA24 from below, generating a preliminary signal;

• 2 – the price is rising above both moving averages. The body of the green candlestick is larger than the previous red candlesticks (red candlesticks – correction) – a classic uptrend signal;

• 3 – the Awesome Oscillator crosses the zero line after a series of green bars, confirming an uptrend signal.

The signal would allow taking profit on 3-4 candlesticks. This is another confirmation that the Awesome Oscillator signals can be mainly applied to the period of up to 5 candlesticks.

Zero-Line Crossover

A buy signal is the simplest to identify. The histogram crosses the zero line from below. A sell signal appears when the AO crosses the zero line from above.

False signals appear quite often, so this algorithm is only used to confirm signals received from other indicators.

Twin Peaks

A buy signal is generated if the following conditions are met:

• The indicator value is below the zero line;

• The second swing low is formed above the first one;

• The third low formed above the second one confirms the signal.

You can look for entry points immediately after the second extremum has formed or at the moment of crossing the zero line.

A sell signal is generated if the following conditions are met:

• Both highs must be above the zero line;

• The second high is below the first one;

The third high should be below the second high, confirming the signal.

Example of a false signal:

Here we have two sell signals:

• Three highs appeared above the zero line, each lower than the previous one. This is considered a sell signal;

• A bearish divergence emerges as there is a discrepancy between the price extremums and the indicator values. The indicator shows a downward movement, which means you should prepare to sell the asset.

Both signals are false as the price did not fall. The reason may be fundamental factors that the Awesome Oscillator does not take into account.

Saucer

The formation of a "Saucer" pattern on the indicator is considered a relatively weak signal because of its delay. By the time it is fully formed, the price has already passed most of the trend. Therefore, it is recommended to use it only for trading on the next 3-4 candlesticks after the signal appears.

Another issue is the interpretation of the signal in different sources. Most sources write that the pattern is formed by three bars. To buy: the first - any color, the second - a red one formed below the first, and the third - green, above the previous red. For a short trade, the opposite is true. The second bar is green, and the third is red and higher than the second green. Tests show that such combinations occur frequently and are not a signal.

The principle of forming a "Saucer" pattern on the indicator with an additional filter:

• Three upward moving bars are formed. For buying, three green bars should be above the zero line, for selling - three red bars are below the zero line;

• Three bars of a "Saucer" pattern point to a trough. The number of bars in the trough does not matter;

• The condition of three bars is fulfilled. Buy: the second red bar is below the third green one. To sell: the second green bar is lower than the third red one;

• After the trough, the bars resume moving in the initial direction. The trade is opened when the indicator goes beyond the previous extreme level.

In this interpretation, a filter is added to the "three columns" rule in the form of a preset move towards the trend and a breakout of the last extremum.

Examples of a trading strategy using the Awesome Oscillator:

1. Opening a long trade based on bullish momentum.

• 1 – green bars form above the zero line, giving a premature signal;

• 2 – a trough is appearing;

• 3 – a bullish "Saucer" pattern has emerged. The second red bar is below the first one, and the third green bar is above the second red bar;

• 4 – the value reaches the previous high;

• 5 – open a long trade.

2. Opening a short trade in a bearish market:

• 1 – three bars are formed below the zero line. It is a premature signal;

• 2 – the formation of a trough has begun;

• 3 – three bars are forming: the middle green one is lower than the first green one and the third red one. It is a "Saucer" pattern with bearish momentum;

• 4 – the value reaches the previous extremum;

• 5 – open a short trade.

It is up to you to decide whether it is worthwhile to additionally filter the signal of the "three main bars" or to be guided only by them. You can answer this question by testing this strategy on a demo account.

Awesome Oscillator Combinations

You can use the Bill Williams Awesome Oscillator in any intraday and long-term strategy. There are several ways to combine different instruments with the Awesome Oscillator:

• Trend indicators are the most important in most strategies. When the trend indicator signal is confirmed by the filtering Awesome Oscillator, you can consider opening a trade;

• After a price reversal, a new trend usually begins, so it would be logical to combine a trend-confirming AO with oscillators that help distinguish reversals from corrections, such as RSI;

• Horizontal and vertical volume indicators. Volume growth indicates investor interest in the asset. Therefore, if the growth of the AO indicator bars is accompanied by an increase in trading volumes, it indicates a strong trend movement. This condition is valid for both upward and downward trends.

These strategies can be combined and turned into a trading system with a moderate level of risk. However, the more complementary and filtering tools you apply, the less often the signals will appear and the lower the effectiveness of the strategy, since unprofitable signals will still appear.

Real Life Awesome Oscillator Strategy Examples

The Awesome Oscillator can be used in trend and channel strategies. It is less suitable for swing trading because corrections are usually short-term, and there is no time to interpret them quickly. For example, the formation of two lower highs can last more than 20 candlesticks, while the correction duration is shorter.

Trend strategy

General idea:

• Trend indicator and the pattern shows a possible trend. You can use the Alligator indicator as a trend indicator and a couple of MAs at your discretion. Trend lines, resistance/support levels can also come in handy. When the AO shows a reversal at a price high, this is a preliminary signal. Once the second lower high is formed and/or the AO crosses the zero line, you can open a trade;

• Set a stop-loss order at the next swing extreme level or according to your risk management rules;

• Take 50% of profits after the price increases by 15-20 points on the H1 chart, the rest part is secured by a trailing order at a distance of 10-15 points. For higher time frames, a take-profit order should be placed higher.

A take-profit order is set 25-30% of the asset’s average daily volatility. If the volatility calculator shows that the average daily price movement is 80 points, then the price can move 25 points during a trend movement.

Example.

At zoomed-out scale on the AUD/NZD H1 chart as of 05.06.2024 12.00 (vertical dotted line) the following can be seen:

• On May 22-23, the indicator plummeted sharply below the zero line. The next strong extremum is seen on June 4;

• On June 5, the AO forms a "Saucer" pattern, signaling a downtrend continuation;

• On June 5, several extremes formed a downtrend line on the chart.

These are preliminary signals, giving no confirmations to open a trade yet.

On 06.06.2024, the situation is the following:

• The trend line is broken through from below. It can be a false breakout, but the AO formed a "Twin peaks" reversal pattern. Traders might consider opening long trades;

• The price tested the trend line again. The trend turned bearish, but the price bounced upward after touching the trend line;

• The AO value crossed the zero threshold from below.

Wait for the AO to form 2-3 bars to confirm the signal and open a long trade. A stop-loss order should be placed at the previous low (marked by the blue line on the chart).

The trade opened on the candlestick indicated by the arrow would bring about 36 pips of profit at the closing peak at 4-digit quotes including spread and excluding swap (opening price - 1.07525, closing price - 1.07899). This is another confirmation that on the H1 chart it is worth sticking to the rule of closing a part of a trade at the level of 15-20 pips, placing a trailing stop order for safety reasons.

Conclusions:

• The "trend line breakout with a retest" signal is the main one confirmed by the AO;

• The Awesome Oscillator indicator gave a preliminary signal, which coincided with the trend line construction;

• Several AO signals were used in the strategy. First, the formation of the "Saucer" pattern pointed to a continuation of the downtrend, then the "Twin peaks" pattern confirmed a potential reversal. After that, the crossing of the zero line gave a final confirmation of the trend reversal.

Do not rely on the first AO signal to open a trade. Use it as a preliminary signal and wait for the next series of signals to appear.

Channel trading strategy

Channel trading strategies have three main types:

• The price tends to reach its average value. The further it moves away from the average, the more likely it is to reverse in the absence of fundamental data. If there are no fundamentals, bulls refrain from buying an asset at expensive prices, and bears will not sell it for almost free;

• Against fundamental factors and bullish/bearish pressure, the price can break through the channel boundary. The channel expands, and a strong price movement begins;

• The middle line of the channel is the "golden mean". Price breaks through it on impulse or rebounds from it like from a resistance/support level.

General idea:

• Three options: opening a trade during a bounce from the channel boundary, a breakout of the boundary, or trading using the middle of the channel;

• A stop-loss order is placed at the nearest extremum or in accordance with your risk management rules;

• Close 50% of the position when the price reaches the middle of the channel, and the rest 50% is protected by a trailing stop order. In case of breakout, 50% of profits is taken after the asset covers 20-25 pips on the H1 chart, the rest part is protected by a trailing stop order at a distance of 10-15 pips.

Example.

The Keltner Channel indicator is used on the USD/CAD H1 chart at standard AO settings. Unlike Bollinger Bands, it does not expand at breakout. A non-standard extension – multiplier 3 – has been added in the settings. It expands the channel, the borders of which can be used as resistance and support levels.

The main signal is a breakout of the middle line. If the price bounces from the channel boundary, goes to its middle and breaks through it, there is a strong impulse trend. A take-profit order should be placed at the opposite boundary of the channel. The AO should confirm the signal.

Situation 1:

• The AO formed a "Twin peaks" pattern, giving a preliminary signal. We should look for an uptrend signal;

• The price broke through the channel's middle line. It is possible to open a long trade as the AO approaches the zero line. A stop-loss order is placed below the swing extremum (blue line);

• A retest of the channel's middle confirmed the uptrend. The AO crossed the zero line from below. After the AO forms three bars, open a long trade (yellow arrow).

Close 50% of the position when the price reaches the opposite channel boundary. The other half is protected by a trailing stop order.

Situation 2:

• The price pierced the channel's middle line from above; 

• The AO showed downward movement after the price peaked.

Both signals are weak, but a short trade would bring a small profit. Note that although the AO crossed the zero line from above, the price has already reached the channel boundary, and it is too late to open a trade using the signal. This shows that the Awesome Oscillator is a confirming indicator, not a main one.

Situation 3:

• The price broke through the channel's middle line from above;

• The Awesome Oscillator draws a "Saucer" pattern.

The yellow arrow marks the point where you can open a short trade using the early signal or wait for the AO's second red bar to form and open a position after the third red candlestick appears. A stop-loss order is set at the previous swing extremum (blue line). Close 50% of the position after the price touches the opposite channel boundary.

In this case, all three signals turned out to be profitable. However, there are three nuances:

• In this case, all three signals turned out to be profitable. But there are three nuances:

• In the second and third cases, the profitability amounted to 25-30 points each in 6-7 hours, excluding the spread, provided the timely market entry and exit. If the trades were closed one candlestick later, the profitability would have fallen to 15 points;

• Swap appears on a trade opened for eight or more hours. This is an additional cost that should be kept in mind;

• There are false signals too, so if you set the profitability of one position at least 15-20 points, the stop-loss order should be placed at the same distance or less, so that a losing trade is covered by a profitable one.

This strategy can be taken as a basis and improved. For example, change indicator settings, add filters, and switch to the daily time frame.

What Are The Advantages and Disadvantages of The Awesome Oscillator?

The advantages of the Awesome Oscillator indicator include:

• Versatility. Tests show that the indicator gives signals equally well in the currency, stock, and commodity markets.

• Ease of interpreting signals. There are relatively few signals. Therefore, after a brief practice, any novice trader will be able to quickly identify a confirmation signal.

• Absence of redrawing. The indicator gives signals that do not redraw over time.

The disadvantages of the Awesome Oscillator indicator include:

• False signals during flat periods. The Awesome Oscillator AO is a trend oscillator. It shows strong trends well, but when the Forex market is flat, the number of false signals increases.

• Impossibility of application on lower time frames. Sharp price spikes often appear on the M15 time frame and the lower ones. For example, it can be caused by market makers. Because of this, the Awesome Oscillator can give a lot of false signals. The indicator works best on time frames from H1.

• There are no overbought and oversold areas. The indicator can show a potential trend reversal, but it does not point to clear overbought/oversold areas like the Stochastic or RSI do.

• The AO does not take volume into account. Trading volume is used to analyze the strength and stability of the trend, but it is not included in the AO formula.

For your convenience, the advantages and disadvantages of the Awesome Oscillator indicator are collected in a summary table:

Where Can the Awesome Oscillator Go Wrong?

Weaknesses of the Awesome Oscillator indicator:

• When it is used as the main indicator. The Awesome Oscillator confirms signals of trend instruments. As the main indicator, the probability of false signals can be more than 40-50%.

• When it is used amid strong fundamental data releases. The Awesome Oscillator can give false data about the trend direction against the news. The most important news from the economic calendar often affects the Forex market, increasing volatility and making price fluctuations wider. The fast MA in the indicator formula reacts instantly, but the next candlestick may move in the opposite direction.

• During elevated volatility. The SMA(34) reacts slowly to a sharp increase in the amplitude of the price movement, smoothing out the sharp reaction of the indicator. The slow change in the height of the bars due to the lag of the SMA is the delay of the AO.

• When it is used on lower M1, M5, M15 time frames.

If the trading platform allows it, you can experiment with the MA settings. When trading currency pairs with high volatility, it makes sense to increase the period of the fast moving average to reduce the sensitivity of the Awesome Oscillator and the number of false signals due to sharp price movements.

On higher time frames from H4-D1, it is possible to reduce the period of the slow moving average for more frequent generation of signals, filtering them with other tools.

Conclusion

Let's summarize:

• The Awesome Oscillator is a basic technical indicator used on most platforms and is calculated as the difference between the SMA(5) and SMA(34). The median price (½ High + ½ Low) is taken into calculation of moving averages.

• Main signals: crossing the zero line, a "Twin peaks" pattern (decline of extremums give a trend signal), a "Saucer" pattern (formation of a trough – the price will continue to move according to the trajectory of exiting from the trough).

• Advantages: a good tool confirming the signals of trend indicators.

• Disadvantages: does not work in moments of high volatility on time frames below M30, does not show overbought/oversold zones.

• Combination with other instruments: an auxiliary oscillator that combines well with RSI, moving averages, Momentum, and Bollinger Bands.

• Suitable for trend strategies, channel indicators with the addition of volume indicators.

I hope this simple tool will help to boost your profit. Feel free to experiment with the indicator settings, but remember to follow your trading system’s money management rules. Ask questions in comments and enjoy your trading!