Awesome oscillator trading system
I don't know about you, but what was Bill Williams thinking when he came up with the name awesome oscillator? With names floating around as complex and diverse as moving average convergence divergence and slow stochastics , I guess Bill was attempting to separate himself from the fray.
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To learn more about the awesome oscillator from its creator, check out Bill's book titled 'New Trading Dimenstions: How to Profit from Chaos in Stocks, Bonds, and Commodities'.
In this article, we are going to attempt to better understand why Bill felt his indicator should be considered awesome by evaluating the three most common AO trading strategies and a bonus strategy, which you will only find here at Tradingsim.
Well by definition, the awesome oscillator is just that, an oscillator. That's right folks, not an EMA or displaced moving average , but yes, a simple moving average. To my earlier point, if you have a basic understanding of math, you can sort out the awesome oscillator equation. Comparing two different time periods is pretty common for a number of technical indicators , the one twist the awesome oscillator adds to the mix, is that the moving averages are calculated using the mid-point of the candlestick instead of the close.
The value of using the mid-point allows the trader to glean into the activity of the day. If there was a ton of volatility, the mid-point will be larger. One point to clarify, while I listed x in the equation, the common values used are 5 periods for the fast and 34 periods for the slow. You however, reserve the right to use whatever periods work for you, hence the x in the above explanation.
Depending on your charting platform, the awesome oscillator can appear in many different formats. Nevertheless, the most common format of the awesome oscillator is a histogram.
The awesome oscillator will fluctuate between positive and negative territory. Hence, you can have a green histogram, while the awesome oscillator is below the 0 line. Now that we are all grounded on the awesome oscillator, let's briefly cover the 3 most common awesome-oscillator day trading strategies.
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If you use this strategy by itself, you will lose money. I hate to speak in such absolutes, but to trust an indicator blindly without any other confirming analysis is the quickest way to burn through your cash. Therefore, the strategy, if you want to call it that, calls for a long position when the awesome oscillator goes from negative to positive territory.
Conversely, when the awesome oscillator indicator goes from positive to negative territory, a trader should enter a short position. Without doing a ton of research, you can only imagine the number of false readings you would receive during a choppy market.
In the above example, there were 7 signals where the awesome oscillator crossed the 0 line. Out of the 7 signals, 2 were able to capture sizable moves. This 5-minute chart of Twitter illustrates the main issue with this strategy, which is that the market will whipsaw you around like crazy.
The setup consists of three histograms for both long and short entries. Without going into too much detail, this sounds like a basic 3 candlestick reversal pattern that continues in the direction of the primary trend. In the above example, AMGN experienced a saucer setup and a long entry was executed. If you trade the saucer strategy, you have to realize you are not buying the weakness, so you may get a high tick or two when day trading. Naturally, this is a tougher setup to locate on the chart.
However, you can find this pattern when day trading literally dozens of times throughout the day. It doesn't account for trend lines or the larger formation in play. Due to the number of potential saucer signals and the lack of context to the bigger trend, I am giving the saucer strategy a D.
As you have probably already guessed, of the three most common awesome oscillator strategies, I vote this one the highest. Reason being, the twin peaks strategy accounts for the current setup of the stock. This approach would keep us out of choppy markets and allow us to reap the gains that come before waiting on confirmation from a break of the 0 line. As you can see in the above example, by opening a position on the break of the trendline prior to the cross above the 0 line, you are able to eat more of the gains.
The other point to note is that the downward sloping line requires two swing points of the AO oscillator and the second swing point needs to be low enough to create the downward trendline. After the break, the stock quickly went lower heading into the 11 am time frame. The most popular awesome oscillator trading strategies aren't that great, but of the three, the twin peaks is the best. However, after reading this article I hope you will go out and evangelize the AO Trendline Cross to the masses.
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Top 4 Awesome Oscillator Day Trading Strategies. Awesome Oscillator 0 Cross. Awesome Oscillator Saucer Strategy.
Bearish Twin Peaks Example. Bearish AO Trendline Cross. How to Improve your Trade Entry and Execution. How to Day Trade with the Triple Exponential Moving Average TEMA.
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