Awesome Oscillator: How to Use? Strategy & Calculation

Awesome oscillator

Predicting the future is the best way to pocket profits in the stock market. But that is not easy, especially when dabbling with something as complex as stock markets.

But technical indicators are something that can be of help here. They use the past’s help to understand and predict the market in the future. One of the most used predictions here is the market momentum.

There are many tools that you can use to gauge market momentum, and an awesome oscillator is one of them. Developed by Bill Williams, the indicator works both as a detection and a confirmation tool.

Let us learn more about awesome oscillators and see how they can help you trade better.

What is An Awesome Oscillator?

What is An Awesome Oscillator

An awesome oscillator is a technical indicator that helps traders gauge market momentum. It helps traders in two ways mainly – to confirm trends and predict a possible trend reversal. The indicator does this by comparing the current market momentum to the general market momentum.

The indicator was developed by the legendary stock market trader Bill Williams. Williams has written many books and publications on technical analysis tools and trading psychology, helping traders around the world formulate successful trading strategies. He has over two decades of experience in trading and teaching market trading. The indicators he developed, including awesome oscillators, are still widely used by traders and are available on different trading platforms.

The Calculation behind Awesome Oscillator

Awesome Oscillator shows a 34-period simple moving average or SMA, charted through the bars’ central points, subtracted from the 5-period simple moving average, and then graphed across the central points of the bars.

Below is the awesome oscillator formula to calculate the same.

AO = SMA(MEDIAN PRICE, 5)-SMA(MEDIAN PRICE, 34)

Where MEDIA PRICE = (HIGH+LOW)/2

Here,

SMA is the Simple Moving Average,
HIGH is the highest price of the bar,
and LOW is the lowest price of the bar.

But, thanks to technology, the indicator is readily available on most trading platforms today. All you need to do is enable it in your graph alongside the price chart. But how is it represented on the chart, and how can you read an awesome oscillator? Let us explore.

How to Read Awesome Oscillator?

How to Read Awesome Oscillator

Take a look at the picture above. It shows the chart for Infosys on a particular day. The above graph is the price chart filled with different candlesticks. But below that, you can see a graph with red and green bars with a line right in the middle valued at zero. This is what an awesome oscillator would look like.

Now, let us examine the significance of the red and green bar and the middle line.

Zero line

Zero line

Here, the line in the middle is the zero line. As the name suggests, it is valued at zero. The line acts as the neutral point, with the line histograms on either side of it indicating different meanings.

Histograms

The bars on either side of the zero line are histograms indicating different momentums. Take a look at the price and awesome oscillator graph of HDFC Bank on a particular day.

Histograms

Here, it is very evident how closely the price graph follows the awesome indicator charts. From this, you can understand three things.

1) Histograms above the zero line indicates a bullish trend, and histograms below the zero line indicate bearish momentum.

2) A green bar indicates that the closing price of the bar is higher than its opening price, and red bars show that the closing price is lower than the opening price.

3) The indicator crosses the zero line from below signaling a bullish trend or momentum change while the indicator crossing the zero line from above shows a bearish trend.

Awesome Oscillator as a Divergence Indicator

Awesome Oscillator as a Divergence Indicator

You can also read divergence using an awesome oscillator. Take a look at the above graph. Here you can see the price movements that are inconsistent with the below awesome oscillator chart. This usually indicates a trend reversal. Let us see how the same can give us buy and sell signals.

Here, when a price chart forms a low below the previous low, and the awesome oscillator chart’s low is higher than the previous low. This could mean that the bears in the market and getting weaker and the bears could take over. Hence, it is a buy signal. You could employ stop-loss at certain points to avoid loss as well.

On the contrary, the chart indicates a bearish momentum when the price chart forms a new high above the previous high, but the awesome oscillator chart’s new high is below the previous bar. Opposite to the above situation, this shows that the bulls are getting weaker and the bears stronger. Thus, it gives a sell signal. You could enter into a short position to make the best out of this situation here.

How Do You Trade with Awesome Oscillators?

We have now seen how to read the awesome oscillator charts along with the price charts and what different changes in the awesome oscillator chart mean. Now, let us learn about how to put it to use during practical situations.

Zero line crossover 

As we have discussed above, when the indicator crosses over the zero line, it indicates different trading signals. If indicator lines are crossing the zero line from below, it denotes a bullish crossover, while if the indicator lines are crossing the zero line from below, it denotes a bearish crossover. But how do you enter a trade position based on this information? You could go for either a long set-up or a short set up, according to the situation. Let us learn how.

Long setup

Long setup

Take a look at the picture above with both price movements and awesome graphs of Reliance industries on a particular day. Pay attention to the circled and the area denoted by the arrow. Does it seem like a good point to enter a long position? In hindsight – yes, correct? But what could have made you able to predict this in not-so hindsight would be the awesome oscillator chart. Here, as soon as the indicator crosses the zero line from above, there is a clear bullish trend. But all are such crossovers good for long positions? It might not be. Hence, it is important to confirm the trend as well. One thing you can look for is three consecutive green bars, like in the above situation. Don’t forget to set a stop-loss as well to minimize the effects of a trend reversal.

Short setup 

Short setup 

Now, look at the above picture. It is the price and awesome oscillator charts of the same company that we have discussed above but on a different day. What we see here is the opposite of the one above. Here, the price seems to be in a downward trend after three consecutive red bars following a crossover from above. This makes that point an ideal place to enter a short position. But the above graph is interesting. If you look at the candlesticks in the price chart, you can see a smaller green candle right after the third consecutive red candle. This could be a point of worry for many traders if they have entered a short position looking at the awesome oscillator chart. But see the fruit of sticking to your plan and keeping it simple. The price continues to go down after the green candle, which was not complemented by a green bar in the awesome oscillator indicator chart. This underlines the accuracy of Bill Williams’ awesome oscillator indicator.

Saucer

One of the most common awesome oscillator indicator strategies is the saucer strategy. Traders use it to identify rapid changes in the momentum of a stock. Here, too, traders can enter either a long or short position according to the kind of saucer that is spotted.

There are two saucers to look at here – a bullish saucer and a bearish saucer.

Bullish saucer

Bullish saucer

The above picture is an example of a bullish saucer. For it to be considered a bullish saucer, it has to meet four criteria.

  1. The awesome oscillator indicator is above the zero line.
  2. There are two consecutive red histograms.
  3. The second red histogram is shorter than the first.
  4. The third histogram is green.

In this scenario, the stock’s price may gain bullish momentum; hence, you could enter a long position in the fourth candle. In the above graph, you can see how a long position at the saucer point could have been beneficial..

Bearish saucer

Bearish saucer

A bearish saucer is the opposite of a bullish saucer. Four criteria have to be met for it to be a bearish saucer.

  1. Awesome oscillator indicator is below the zero line.
  2. There are two consecutive green histograms.
  3. The second green histogram is shorter than the first.
  4. The third histogram is red.

Here, contrary to the bullish saucer, you could enter a short position on the fourth candlestick on the open.

Twin peaks

Twin peaks is another strategy you can form from reading an awesome oscillator graph. Here, too, there are two contraries – bullish twin peaks and bearish twin peaks.

Bullish twin peaks

Bullish twin peaks

Bullish twin peaks give you a signal of a robust bullish momentum change. There are three criteria to meet here.

  1. The awesome oscillator indicator stays below the zero line.
  2. The awesome oscillator shows two low swings. The second swing’s low is higher than the first’s.
  3. The histogram that comes after the second low is green.

As you can see from the above graph, the stock price trend reverses to enter a bullish area. You can apply an appropriate trading strategy here to make the most out of this information.

For instance, you could enter a long position after the green bar that comes after the second swing’s low. You could also set up a stop-loss to make sure you minimize losses from any false signals.

Bearish twin peaks

Bearish twin peaks

Contrary to a bullish twin peak, bearish twin peaks show a sell signal. Take a look at how the price changes after a bearish twin peak. But how is it identified? There are three criteria that the awesome oscillator chart has to meet here.

  1. The awesome oscillator stays above the zero line.
  2. The awesome oscillator sees two peaks and the second peak is lower than the first one.
  3. The histogram after the second peak is a red bar.

An appropriate trading strategy here is to enter a short position to make use of the bearish trend reversal. You could also sell your stocks when they sell signals show up to minimize the loss.

Unlike the other strategies we have discussed, the twin peaks strategy makes use of more data and hence, many traders consider it more trustworthy.

How to do Scalping using Awesome Oscillator?

Scalping is a trading strategy where the trader takes advantage of the smaller ups and dips of the price during intraday trading. Awesome oscillator set to a smaller time frame can be used as an excellent indicator for the same. You can use any of the strategies mentioned above to identify a sell or buy signal as well. The strategy works best when another indicator is used for confirmation as well.

MACD and Awesome Oscillator Strategy

Like every other indicator, the awesome oscillator indicator and its strategies work best when clubbed with other indicators. Other similar indicators could complement the information by confirming the trend. This could also help you weed out false signals from the awesome oscillator indicator. The MACD indicator is one such tool that complements the awesome oscillator indicator. Both are similar tools to gauge market momentum. Here, the MACD indicator can be used to set exit and entry points, while the awesome oscillator can be used to confirm the trends.

Awesome Oscillator vs MACD

As we have discussed above, MACD and awesome oscillator are similar tools. But they have their differences too.

Firstly, the awesome oscillator uses a 34-period and 5-period SMA. At the same time, the MACD indicator uses 26-period and 12-period EMA along with the 9-period signal line.

Secondly, awesome oscillator calculations are based on the median price, while MACD calculations focus on the closing price.

Which is better MACD or Awesome Oscillator?

Both awesome oscillator and MACD are time-tested and proven trading indicators. The choice between the two, if need be, should be based on your personal preferences and trading plans. For instance, as said above, MACD focuses on closing price while awesome oscillator on the median price. Hence, if your trading plan is complemented more by an indicator that uses median price, you could use the awesome oscillator instead of MACD and vice-versa.

Accelerator Oscillator vs Awesome oscillator

The accelerator oscillator is another trading indicator developed by Bill Williams. It used data from an awesome oscillator and subtracted it by a five-period simple moving average. Thus, this indicator helps in detecting early momentum changes. Both look similar in appearance and functioning, but an accelerator oscillator can be called proactive compared to an awesome oscillator.

Advantages vs Disadvantages

 Awesome oscillator comes with its set of pros and cons. The most significant advantage here is that it is one of the most valuable indicators since it measures market momentum. This makes it extremely useful during trending markets. Additionally, they can be used with other types of assets as well.

An awesome oscillator’s major disadvantage is that it might show false signals based on your trading strategy. Hence, it is best not to use it as a standalone indicator.

Bottomline

An awesome oscillator is a valuable tool to measure market momentum, and it can be beneficial in set trading strategies. The key is in the nitty-gritty details. Pay attention to each bar and act accordingly to make the best out of your awesome oscillator indicator strategies.

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