Deep dive into Awesome Oscillator

Hello, Skyrexians!

We continue our educational series, and today we’re focusing on the Awesome Oscillator, an indicator introduced by Bill Williams in his book "Trading Chaos." This tool can be incredibly useful for your crypto trading. Many crypto trading strategies incorporate the Awesome Oscillator, and you can combine it with other indicators to build a trading algorithm, a bot, or even improve your manual cryptocurrency trading strategy. It's widely used by top crypto traders and trading platforms for automated crypto trading. By understanding how to trade with the Awesome Oscillator, you can enhance your automated trading bots, improve manual strategies, or fine-tune grid trading bots more effectively. We believe there are plenty of reasons to learn how to utilize this indicator—so let’s dive in!

What is Awesome Oscillator? 

The Awesome Oscillator (AO) is a momentum indicator used in technical analysis to gauge the strength and direction of a market trend. Developed by Bill Williams, it helps traders identify potential reversals or trend continuations.

Key Features of the Awesome Oscillator:

• Momentum Measurement: AO measures the difference between a short-term and a long-term moving average, using the midpoints of each candlestick instead of the closing prices. This gives a clearer view of market momentum.
• Histogram Representation: The indicator is displayed as a histogram, with bars fluctuating above and below a zero line. Green bars indicate increasing momentum (bullish), while red bars signal decreasing momentum (bearish).

The formula for calculating the Awesome Oscillator is based on simple moving averages (SMA):

AO = SMA(5-period) − SMA(34-period)

Now, let’s look at the signals produced by the Awesome Oscillator, along with examples.

Buy signal "Plate"

The "Plate" buy signal is unique in that it must form above the zero line. The concept is straightforward: you simply wait for the specific sequence of bars to appear on the Awesome Oscillator, as shown on the chart.

As we can see, the "Plate" signal consists of three bars. Bars 1 and 3 must be higher than bar 2. When this sequence appears, the signal is activated once the price breaks above the high of the price bar corresponding to bar 3 of the Awesome Oscillator. It's important to note that for this signal to be valid, the price should be above the Alligator's red line, and the last upward fractal must have been broken. Below is an example of a successful "Plate" signal.

Buy signal "Zero line cross"

This type of long signal requires only two bars on the Awesome Oscillator histogram. The first bar must be below the zero line, and the next bar must be above it. This indicates a high probability of a transition from a bearish trend to a bullish one. The chart below illustrates this bar sequence.

Let’s move on to the example on the price chart below. We can see that the price has broken through the fractal level. From this point, we can begin watching for the Awesome Oscillator’s "Zero Line Cross" buy signal. Once the signal forms, we wait for the price to break above the high of the signal candle before entering a long trade.

Buy signal "Double Bottom"

The final buy signal is the double bottom on the Awesome Oscillator. First, you should wait for the initial bottom to form below the zero line. After that, the AO bars should not cross the zero line again until the second bottom appears, as shown in the chart below. The confirmation comes with the first green bar following the formation of the second bottom.

On the chart below you can see the example of this signal execution.

Conclusion

The Awesome Oscillator is a momentum-based indicator created to assist traders in detecting shifts in market momentum and potential trend reversals. By examining the difference between short-term and long-term momentum, the AO offers valuable insights into the strength and direction of price movements, enabling traders to make more informed decisions.Best regards,Skyrexio Team