Awesome Oscillator (AO) is an indicator by Bill Williams, which grounds on the MACD indicator. Bill Williams considered that this indicator shows current market driving forces.
AO is a 34-period Simple Moving Average of the median price of the bars ((H+L)/2), which is subtracted from the 5-period SMA of the median price of the bars. The Indicator has a form of a histogram and fluctuates around the zero line. The histogram has two colors green and red. When a histogram bar higher than previous – it is green, otherwise it is red.
Bill Williams describes Awesome Oscillator in his book “New Trading Dimensions”.
MP = (HIGH + LOW) / 2
AO = SMA (MP, 5) — SMA (MP, 34)
SMA – Simple Moving Average
MP – Median Point
How to use it
Like MACD Awesome Oscillator is a momentum indicator reflecting the changes in the market driving force and helps to identify trend force and turnaround points. When the indicator is higher than zero line – the market is in an uptrend, indicator lower than zero line – stands for a downtrend. Green colors of the histogram indicate uptrend powers privilege; red colors show the domination of the downtrend forces. Nevertheless, the main part of AO indications is its patterns.
A Saucer is a pattern which indicates trend following Buy and Sell signals. To form Saucer, pattern needs at least three histogram bars.
Bullish Saucer (Buy signal)
All histogram bars are higher than zero line; First bar is higher than the second and second bar is lower than the third bar. So the pattern has colors green-red-green.
Bearish Saucer (Sell signal)
All histogram bars are lower than zero line; First bar is lower than the second and second bar is higher than the third bar. So the pattern has colors red-green-red.
Twin Peaks is the pattern which indicates overbought and oversold market states. So, a bearish signal occurs during an uptrend and a bullish signal occurs during a downtrend. Basically, the pattern has the form of two consecutive peaks. Peak are considered the lowest or the heist point for the period, depending on the trend direction. Usually, the second peak has to be weaker than the first one, lower in the case of the uptrend and higher for the downtrend. Twin peaks during the uptrend indicate the Bearish signal; Twin Peaks during the downtrend indicates the Bullish Signal.
Zero Line Cross
Zero line crossovers show trend-changing points. Line Crossover signal needs two bars; one should be higher than zero line, second – lower and vice versa.
Buy signal occurs when OA crosses Zero line from bottom-up. Sell pattern happens when histogram crosses zero line from above-down. Since the indicator has a lag, these signals are a trend-following.