A Beginner's Guide to Awesome Oscillator Indicator in Forex
If you are looking for an indicator that can help you spot reversals or trend continuations, the Awesome Oscillator might be worth adding to your Forex charts.
In this post, we will explain exactly what this momentum indicator is and how you can use it to help you spot trade opportunities.
What is the Awesome Oscillator indicator?
The Awesome Oscillator measures momentum, and was invented by Bill Williams. Sometimes, it is simply abbreviated as AO.
When you plot the indicator on your chart, you are looking at the difference between two simple moving averages: the 5-period SMA and the 34-period SMA plotted over midpoint (median) prices.
How is the Awesome Oscillator indicator calculated?
Here is how the Awesome Oscillator indicator is calculated:
That is all there is to it. But you do not need to worry about even this simple math, as your trading platform will handle it for you.
What does the Awesome Oscillator indicator show us?
This indicator displays on your chart as a histogram underneath the price graph. The histogram helps you visualize whether bullish or bearish momentum is at play. Above the zero line, it is bullish. Below the zero line, it is bearish.
How to plot the Awesome Oscillator indicator on your charts?
If you are using MetaTrader 4, it is fast and easy to plot the Awesome Oscillator.
- In the menu, click on Insert, then Indicators, then Bill Williams, then Awesome Oscillator.
- In the dialog box that opens, you will have a chance to input your parameters, which is as simple as choosing the colors you want for Value Up and Value Down (we recommend green and red). Click OK, and the histogram will appear on your chart.
That is all you need to do. You are now ready to start trading using the Awesome Oscillator.
How to use the Awesome Oscillator indicator while you trade?
One of the cool things about the Awesome Oscillator indicator is that there are a number of ways you can use it to identify potential Forex trade setups.
The simplest and most straightforward way to use the Awesome Oscillator is to trade crossovers of the zero line.
- If the Awesome Oscillator histogram crosses above the zero line, that is a buy signal.
- If the Awesome Oscillator histogram crosses below the zero line, that is a sell signal.
Twin peaks is so named because the setup entails a pair of peaks forming one after the other. Whether you are looking for the bullish or bearish setup, the two peaks must both be on the same side of the zero line.
- If you see two peaks form below the zero line, it is a bullish setup. The second peak must be higher than the first, and have a green bar after it. The trough in between must not breach the zero line. You should buy when you see this setup.
- If you see two peaks form above the zero line, it is a bearish setup. The second peak must be lower than the first, and have a red bar after it. The trough in between must not breach the zero line. You should sell when you see this setup.
This type of setup is the hardest to describe, but it is not complicated once you know what to look for.
- Look for three bars in a row above the zero line to form a bullish saucer: a red bar, then a smaller red bar, then a green bar. This is a buy signal. You can enter immediately as the third bar is forming, or during the bar that follows.
- For a bearish saucer, look for three bars in a row below the zero line. The first should be green, the second green as well but smaller, then a red one. It is time to sell.
General tips for using the Awesome Oscillator indicator
To wrap up our discussion on the AO, here are a few general recommendations to get the most out of this indicator.
- Be aware that AO sometimes may fake you out. Do not jump at every single setup you see, as quite a few of them could backfire.
- Add other indicators or use price patterns for confirmation. If you have multiple signals telling you to buy or sell, that is stronger than just having the AO telling you to trade.
- Put your system to the test. Whatever strategy you decide to use with the AO, it is vital that you conduct backtests and demo tests. Make sure the numbers back up your belief that your trading system can generate winning results reliably.
The Awesome Oscillator can help you trade in multiple ways. The AO is a versatile indicator that you can put to work in more way than one to help you generate profits in the Forex markets. Just make sure you are aware of its limitations and are looking for confluence through other indicators before you enter your trades.