Trading Indicator Toolbox – Awesome Oscillator

The last ten articles have been entitled Analysis Toolbox and we discussed the various market cycles including trends and continuations. This next part of the The Trader’s Indicator Series focuses on the Indicator Toolbox, as we will discuss various indicators that are found on most trading platforms. We will discuss the indicator in the context of the chosen market, and if it resonates with you, please continue to do your own analysis with it. Trading successfully is all about feeling comfortable with a methodology and using that system repeatedly even when boredom sets in. I will be discussing indicators in alphabetical order that can be found on the MotiveWave platform. This week its the turn of the Awesome Oscillator (for a free 2-week trial CLICK HERE)

The Awesome Oscillator was created by Bill Williams. This oscillator subtracts a 34-period simple moving average (SMA) from a 5-period SMA. It illustrates what’s happening to the market driving force now.

Awesome Oscillator

INTRODUCTION

The Awesome Oscillator (CAO) is an oscillator which presents as a histogram consisting of red and green bars below the price chart. The values fluctuate above and below the Zero Line. The Awesome oscillator can be used to measure market momentum, and is often used to determine the end of the trend with divergence.

In the chart below, the Awesome Oscillator makes a higher low which indicates divergence when confirming with the GBP/USD price chart above.

The “do not sell here” warning points to the lowest point on the histogram. One would be prudent to wait for the CAO to come back to the zero line before looking to sell again.

Awesome Oscillator

USING THE TOOL

Traders use the Awesome Oscillator indicator to recognize trends, corrections and reversals. The indicator tells you whether the market is trending and how strong the trend is. When the Awesome Oscillator histogram continues to drop below the zero line, the downtrend is strong. As soon as the awesome oscillator histogram bars go from red to green in a downtrend, its best to take profits on short positions as the momentum is changing and the market is due for a correction.

When the Awesome Oscillator histogram is above the zero line with increasing green histogram bars, the uptrend is strong and strength is increasing.  As soon as the green histogram bars change to red, that signals a change in momentum and a warning to get out of long positions ahead of the correction.

The Awesome Oscillator also shows divergence which can be a sign of a weakening trend or a trend reversal. When price makes a higher high and the Awesome Oscillator makes a lower high, this is called divergence with declining momentum. Traders can get forewarned about an imminent market reversal.

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Jody
Jody Samuels, a former institutional trader for a US Investment Bank, and author of The Trader’s Pendulum, The 10 Habits of Highly Successful Traders, founded FX Trader’s EDGE in 2006. A premiere, global online Trading and Coaching School, FX Trader’s EDGE is home to the Forex Foundation and Elliott Wave Ultimate, progressive educational training programs to assist traders of all levels in the markets. FX Trader’s EDGE offers individual and institutional clients proprietary tools, services and education to trade Forex, CFD’s and Stocks online. One-on-one coaching is also available.
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Jody

Jody

Jody Samuels, a former institutional trader for a US Investment Bank, and author of The Trader’s Pendulum, The 10 Habits of Highly Successful Traders, founded FX Trader’s EDGE in 2006. A premiere, global online Trading and Coaching School, FX Trader’s EDGE is home to the Forex Foundation and Elliott Wave Ultimate, progressive educational training programs to assist traders of all levels in the markets. FX Trader’s EDGE offers individual and institutional clients proprietary tools, services and education to trade Forex, CFD’s and Stocks online. One-on-one coaching is also available.

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