Detrended Price Oscillator Trading Indicator
The original Analysis Toolbox articles discussed the various market cycles including trends and continuations. This 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. (for a free 2-week trial CLICK HERE) This week we will be teaching the Detrended Price Oscillator
Detrended Price Oscillator
The Detrended Price Oscillator (DPO) is a lagging, oscillating cycle indicator. It is used to remove trend from price to identify short-term market cycles. Since the DPO is offset to the left, it doesn’t consider current price action and is not aligned with the current candle. This helps to remove current trend.
First, determine the cycle period of the market (20 is standard); which is the rhythmic repetition of its highs and lows. The DPO compares the past price to a displaced moving average. The displacement equals (period / 2) + 1. The user may change the input (close), method (SMA), period length (20) and guide values. The calculation is as follows:
DPO = Close – (Moving Average ((n / 2) + 1)) days ago), where the oscillator is shifted by 20/2 +1, or 11 days when the SMA is 20. This makes the look-back period 11 days prior, and the DPO is calculated as Close – SMA (11 periods ago).
The DPO is not considered a momentum oscillator, as it measures past prices against a simple moving average to measure the cycle’s length and high / low range.
USING THE TOOL
The DPO is not meant to generate buy and sell signals but is a way to help identify the market cycles. Using it in conjunction with Elliott Wave analysis or other techniques is ideal. In the above S&P500 Weekly Chart, prices are detrended to enable traders to see the overbought and oversold levels which are turning points for the short-term market cycles within the long-term cycle.
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