The awesome oscillator compares recent market movements to historic data and shows the outcome in a histogram to predict momentum and trend reversals. Learn more about this trading indicator!
TL;DR
- The awesome oscillator compares recent market movements to historic data and displays the outcome in a histogram to predict momentum and spot reversals.
- The formula for the awesome oscillator involves subtracting a 34-period simple moving average from a 5-period simple moving average.
- It is best used on a daily or weekly time frame and provides bullish or bearish readings based on the position of the moving averages.
- Divergences between the price and the awesome oscillator can indicate potential reversals.
- The MACD indicator is similar to the awesome oscillator but includes exponential moving averages and can be used in conjunction with it for confirmation.
- Risk management and combining multiple tools are important when using the awesome oscillator for trading decisions.
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Introduction
Picture this: you've spent countless hours analyzing charts, studying market trends, and making trading decisions based on intuition. But more often than not, those decisions lead to disappointment and missed opportunities. It's like being trapped in a never-ending cycle of uncertainty and regret.
Enter the Awesome Oscillator, a potentially game-changing tool that will break the chains of doubt and guide you towards better trades. In this article, we'll explore the secrets of this extraordinary indicator, empowering you to conquer your fears and unlock the potential of crypto trading.
The awesome oscillator is a popular technical indicator used by traders in different financial markets. Bill Williams developed the indicator as a simple tool to take advantage of trends, naming it the awesome indicator. Let’s find out if it lives up to its name!
What Is the Awesome Oscillator?
The awesome indicator is what is known as a non-limiting oscillator, anchored to the zero line. This means that the indicator has no limit on how far the oscillator can move away from its zero line. In practice, however, it returns to that line eventually.
The indicator compares recent market movements to historic data over a longer time span and displays the outcome of this comparison in a histogram. Traders use this histogram to predict momentum in the market to determine the strength of a trend and spot reversals.
What Is the Awesome Oscillator’s Formula?
As with any indicator, understanding the way an indicator’s formula is calculated helps traders make better decisions and boosts their understanding of the indicator in general.
Nevertheless, you do not need to calculate the indicator yourself, as it is built into popular charting platforms, like TradingView.
The awesome indicator uses a five-period simple moving average calculated using median prices, and subtracts a 34-period simple moving average (SMA), also calculated using median prices. This results in the following formula for the awesome indicator:
Awesome Indicator = SMA (Median Price, 5 Periods) – SMA (Median Price, 34 Periods)
Reminder: The median price is calculated by adding the highest price and lowest price of a period together and dividing the outcome by two.
Traders can use the indicator on any time frame, but, according to CoinDesk Research, the indicator performs best when used on a daily or weekly time frame.
In simple terms, the indicator will print a bullish reading (above the zero line) when the five-period SMA is higher than the 34-period SMA. The opposite happens when the five-period SMA is lower than the 34-period SMA, resulting in a histogram reading below the zero line.
How To Read the Awesome Oscillator?
Histograms
As discussed, the awesome oscillator is generally displayed as a histogram with green and red bars and a zero line. Like candlestick charts, a green bar means the histogram moves higher, whereas a red bar represents the histogram moving lower.
The market is generally viewed as bullish when the histogram is formed above the zero-line, and bearish when the histogram is formed below the zero-line. The below chart shows the awesome oscillator’s behavior over the past year.
Awesome Oscillator as a Divergence Indicator
CoinMarketCap Academy has covered the concept of a divergence in multiple articles. While most people use the relative strength index to spot these divergences, the awesome indicator can play a similar role.
In short, a divergence happens when an oscillator (such as the awesome indicator, or the relative strength index) behaves differently than the price. For example, if the price prints a lower low, but the awesome indicator prints a higher low, this is viewed as a bullish reversal signal: a bullish divergence. The opposite is true if the price pushes higher, while the oscillator prints a lower high.
The image below is a cheat sheet designed for spotting RSI divergences, but it works the same way for the awesome indicator.
Keep in mind that these divergences are not foolproof. Many traders wait for the awesome oscillator to print a red bar as confirmation of the divergence, before acting on it.
Accelerator Oscillator vs Awesome Oscillator
After developing the awesome oscillator, Bill Williams built another indicator called the accelerator oscillator. This indicator calculates the difference between the awesome indicator and the 5-period simple moving average. It was designed to be more efficient to detect momentum changes in advance.
In simple terms, the accelerator oscillator aims to forecast price changes by measuring the acceleration (or deceleration) of market momentum. It is displayed in a similar manner to the awesome oscillator using a histogram with a zero line, but should not be treated the same!
For example, while a cross above the zero line is viewed as a bullish signal with the awesome indicator, this approach does not work with the accelerator indicator. Instead, traders that use the accelerator oscillator often focus on the color of the histogram; not buying when the histogram is red and not selling when it is green.
How To Use the Awesome Oscillator
In addition to using the zero line and divergences, there are a couple more ways to use this indicator – which we’ll dive into in the next paragraphs.
Awesome Oscillator Scalping Strategy?
While some sources believe the awesome oscillator is most effective on daily and weekly time frames, some traders have managed to build a successful scalping strategy using the awesome oscillator. Scalping is a trading style that takes advantage of frequent, minor price movements. These trades generally do not last longer than a few minutes, sometimes even less than 30 seconds.
Trade Trend Reversals With the Awesome Oscillator
As discussed earlier, the awesome oscillator was developed to predict momentum in the markets. It was designed to determine the strength of a trend and spot reversals.
Zero-Line Crossover
The strongest reversal signal appears when the awesome oscillator crosses the zero line, where a cross above the line is interpreted as a bullish reversal signal, and a cross below the zero line is interpreted as a bearish reversal signal.
Long Setup
The awesome oscillator crossing above the zero line indicates that the short-term momentum is picking up faster than long-term momentum. This is viewed as a bullish reversal signal.
Short Setup
An awesome oscillator crossing below the zero line indicates that the short-term momentum is falling faster than the long-term momentum. This is viewed as a bearish reversal signal and a short trade can be taken.
The below chart shows a few examples. As you can see, some of these signals quickly reversed and printed opposite signals – therefore, traders should use a combination of trading indicators to confirm a signal before making a move.
Awesome Oscillator Trading Strategies
Earlier in this article, we discussed how analysts have studied the indicator and derived signals based on patterns on the histogram. In their studies, they found two major signals in addition to the zero-line crossover: the Twin Peaks pattern and the Saucer pattern.
Twin peaks
The twin peaks strategy is a commonly used approach that utilizes the awesome oscillator to identify potential market reversals. It focuses on observing two peaks on the same side of the zero line. The strategy generates a signal when the second peak, coinciding with the zero line, is closer to zero compared to the first peak.
The chart below is a good example of a bullish twin peaks signal, resulting in an upside:
Bullish Twin Peaks
In short, a bullish twin peaks pattern prints when the awesome oscillator is below zero. In this situation, there are two swing lows, with the second low being higher than the first one. The signal confirms when the histogram flips green after the second low is formed.
Bearish Twin Peaks
A bearish twin peaks pattern prints when the awesome oscillator is above zero. In this situation, there are two swing highs, with the second high being lower than the first one. The signal confirms when the histogram flips red after the second high is formed.
Saucer
The saucer is another popular awesome oscillator trading strategy. This pattern shows a rapid change in momentum in three or more bars that are either below or above the zero line. Saucers can be used to enter or exit a position, depending on the direction the trader is trading in.
Bullish Saucer
A bullish saucer pattern occurs when the awesome oscillator is above the zero line, and two red histogram bars are formed. The second red bar is smaller than the first one. After this, a green bar appears, confirming the pattern. Traders can take a long trade when this confirmation happens, expecting a significant upward movement (not financial advice).
Bearish Saucer
On the other hand, a bearish saucer pattern is the opposite. It occurs when two green bars are formed below the zero line, and the second green bar is smaller than the first one. A red bar confirms the pattern. Traders usually enter a short trade when this confirmation occurs, anticipating a significant downward movement (not financial advice).
The above is a great example of a bearish saucer playing out.
MACD vs Awesome Oscillator Strategy
Our readers must have noticed that the awesome oscillator has similarities to the MACD indicator, but there are a few key differences. One difference is that the MACD not only plots a histogram but also includes two exponential moving averages (EMA). These moving averages respond more quickly to market movements compared to a simple moving average. The MACD uses the interaction between these moving averages to generate signals.
On the other hand, the awesome oscillator primarily focuses on the histogram and calculates the difference between a 34-period simple moving average and a 5-period simple moving average. It measures the momentum of the market based on the histogram bars.
Due to the inclusion of moving averages, the MACD is generally considered a faster indicator compared to the awesome oscillator. This means that the MACD can provide early signals of potential market changes. Traders can use the MACD as a preliminary signal and then seek confirmation from the awesome oscillator before making trading decisions.
Closing Thoughts
All in all, the awesome oscillator can be a powerful technical analysis tool to add to your trading toolbox. Nevertheless, as with all indicators, the awesome indicator is not foolproof and does print false signals from time to time.
It is important to exercise risk management and not use the awesome oscillator alone for trading decisions. Combine multiple tools to form your trading strategies and look for confluence between these tools.
Writer’s Disclaimer: This article is based on my limited knowledge and experience. It has been written for educational purposes. It should not be construed as advice in any shape or form. Please do your own research.
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