An Awesome Forex Indicator

05/27/2014 9:00 am EST

Focus: FOREX

A type of momentum indicator, this oscillator was developed by trader Bill Williams, says staff at FXTM.

The Awesome Oscillator itself takes a simple approach to finding momentum but its strength lies in the fact it is calculated using values that are rarely used by other indicators. It is also designed to find trading setups that are particular only to the indicator itself.

Calculating the AO
The Awesome Oscillator calculates the difference between the five-period simple moving average (SMA) and the 34-period SMA but unlike other momentum indicators and oscillators, the Awesome Oscillator does not use closing values in its calculations. Instead it uses midpoints. This ensures that the indicator finds trades that other, more common indicators miss.

AO = SMA(High+Low)/2, 5 Periods) - SMA(High+Low/2, 34 Periods)

Using the AO
The Awesome Oscillator, once calculated, is shown on the price chart as a green and red bar histogram making it easy for traders to see what is happening in the market.

When the AO is higher than the previous bar, the bar is green, indicating upward direction, and when it is lower it's red, indicating downward direction. Changes from green to red often indicate moments to close a position and vice versa.

When the AO crosses the zero line, it suggests that the market is now trending higher or lower in a sustained manner and this is the main way the oscillator is used for trading signals. In other words, if the AO crosses above the zero line, a buy order should be entered and if the AO crosses below the zero line, a sell order should be entered.

Twin Peaks
As mentioned, the Awesome Oscillator also comes with pre-determined trade setups, with the zero line cross being the most basic.

Another trade setup using the AO is known as the twin peaks setup. A bullish twin peaks setup occurs when there are two peaks in the histogram that both occur below the zero line.

Importantly, the second peak must be higher than the first peak (closer to zero) and it must be directly followed by a green bar. The trough, between the first peak and the second peak, must also stay below the zero line the whole time and this is very important in order to find strong reversals. It's a similar process but in reverse for a bearish twin peaks setup.

The other trade setup to be used with the Awesome Oscillator is called the saucer. A bullish saucer setup occurs when the AO is above the zero line, when two red histogram bars are followed by a green bar. This setup frequently occurs during upward trends and is a good way for traders to get on board long trends if they missed the first zero line cross. The bearish saucer works in the same way but in reverse.

By the Staff at FXTM