Forex trading can sometimes be a daunting and complex activity, especially for those who are new to the game. However, there are many useful tools available to help traders make informed decisions about their trades. One of these tools is the Awesome Oscillator, a technical analysis tool that can be used to assess market trends and identify potential entry and exit points.
If you’re new to forex trading, the Awesome Oscillator may seem like a complicated concept to master. But, in reality, it’s quite simple to use once you understand the basics. The tool works by calculating the difference between the 34-period and 5-period simple moving averages of the price of an asset. When the difference is above zero, it suggests the momentum is bullish. Conversely, when the difference is below zero, it indicates bearish momentum.
By using the Awesome Oscillator in conjunction with other technical analysis tools, traders can increase the chances of making successful trades. Analyzing market trends using indicators like this can help identify potential entry points, while also helping to predict the direction of future price movements. So why not give it a try? You may be surprised at just how effective the Awesome Oscillator can be in your trading strategy.
What is the awesome oscillator?
The Awesome Oscillator (AO) is a technical analysis tool used to measure market momentum. It was developed by Bill Williams, a trader and author of several books on trading psychology and market analysis. The AO is a histogram-based indicator that compares the current market momentum with the momentum of a recent period. It helps traders identify trend changes and potential buy or sell signals.
The AO is derived from the difference between a 34-period and a 5-period simple moving average. The difference is then plotted as a histogram graph below the price chart. The bars are colored green or red, depending on whether the current bar is higher or lower than the previous one.
- Green bars indicate that the current bar is higher than the previous one, indicating a bullish momentum.
- Red bars indicate that the current bar is lower than the previous one, indicating a bearish momentum.
The AO measures the distance between the 5-period and 34-period simple moving averages with respect to the median price of the candlestick. If the difference is positive, a green bar appears, and if the difference is negative, a red bar appears. The wider the distance between the two moving averages, the larger the histogram bars become, indicating a stronger momentum in the market.
Understanding the Calculation of the Awesome Oscillator
The Awesome Oscillator (AO) is a momentum-based indicator created by Bill Williams. It helps traders to measure the momentum of an asset. The calculation of the AO is straightforward since it is simply a difference between a 34-period simple moving average (SMA) calculated on the high of the respective bars and a 5-period SMA calculated on the low of the respective bars. Using this formula, we can construct a histogram that oscillates about a zero level, with the bars changing color depending on whether they are above or below the zero level.
- The 34-period SMA is calculated on the high of the respective bars.
- The 5-period SMA is calculated on the low of the respective bars.
- The AO is calculated as the difference between the two SMAs.
To visualize this calculation better, let’s assume we have five data points, and we want to calculate the AO for each point. The data points are as follows:
| Period | High | Low | 34-period SMA (high) | 5-period SMA (low) | Awesome Oscillator |
|---|---|---|---|---|---|
| 1 | 1.1000 | 1.0800 | |||
| 2 | 1.1300 | 1.1000 | |||
| 3 | 1.1100 | 1.0900 | |||
| 4 | 1.1400 | 1.1000 | |||
| 5 | 1.1500 | 1.1200 |
To calculate the 34-period SMA for the first data point, we need to add up the previous 34 highs and divide the result by 34. Since it is the first data point, we don’t have enough data to calculate the 34-period SMA. Therefore, the first cell is blank; the same is true for the second cell because we still don’t have 34 data points.
To calculate the 34-period SMA for the third cell, we need the previous 34 highs, which are:
1.1000, 1.1300, 1.1000, 1.1400, 1.1500, and 1.1000.
We add them up and divide the total by 34. The result is 1.1147. We perform this calculation for the rest of the data points. The results are shown in the “34-period SMA (high)” column of the table above.
To calculate the 5-period SMA for the first data point, we need to add up the previous five lows and divide the result by five. Since it is the first data point, we don’t have enough data to calculate the 5-period SMA. Therefore, the fourth cell is also blank; the same is true for the fifth cell because we still don’t have five data points.
To calculate the 5-period SMA for the sixth cell, we need the previous five lows, which are:
1.0800, 1.1000, 1.0900, 1.1000, and 1.1200.
We add them up and divide the total by 5. The result is 1.0980. We perform this calculation for the rest of the data points. The results are shown in the “5-period SMA (low)” column of the table above.
Finally, we can calculate the Awesome Oscillator using the formula mentioned above. We subtract the 5-period SMA (low) column from the 34-period SMA (high) column and show the results in the “Awesome Oscillator” column of the table above. You will notice that the Awesome Oscillator value is negative for the first two cells, and it becomes positive in the third cell and remains positive in the rest of the cells.
Using the awesome oscillator to identify trends
The Awesome Oscillator (AO), developed by Bill Williams, is a momentum indicator that can be used to identify trends in forex trading. It compares the current market momentum with the overall momentum of the market over a specified period. When used correctly, the AO can help traders identify potential trends as they occur, allowing for better trading decisions.
- Bullish trend: When the AO is above zero and its value is increasing, it indicates a bullish trend. In this scenario, traders can look for buying opportunities.
- Bearish trend: When the AO is below zero and its value is decreasing, it indicates a bearish trend. In this scenario, traders can look for selling opportunities.
- Consolidation phase: When the AO is close to zero, it indicates a lack of momentum and a consolidation phase. Traders could consider staying on the sidelines until the price breaks out of this period.
It is essential to remember that the AO is a lagging indicator, which means that it reflects past momentum. Therefore, traders should not rely solely on the AO to make trading decisions. However, it can be used in conjunction with other technical indicators to confirm trends and enter or exit positions.
Below is an example of how the AO can help identify trends in the forex market:
| Date | Price | AO |
|---|---|---|
| January 1, 2021 | 1.2000 | -0.0025 |
| February 1, 2021 | 1.2200 | 0.0125 |
| March 1, 2021 | 1.2400 | 0.0350 |
| April 1, 2021 | 1.2600 | 0.0575 |
| May 1, 2021 | 1.2800 | 0.0800 |
In this example, we can see that the AO was below zero in January and began to increase gradually over the months. As such, traders could have looked for buying opportunities as the bullish trend took hold.
Remember, like all technical indicators, the AO has its limitations. Traders should use it alongside other tools to make informed trading decisions.
Recognizing bullish and bearish signals with the awesome oscillator
One of the primary purposes of the Awesome Oscillator (AO) is to provide traders with a reliable tool for identifying bullish and bearish signals in the market. Understanding how to utilize these signals properly can greatly benefit your trading strategy and result in more successful trades. Here are a few ways to recognize bullish and bearish signals using the Awesome Oscillator:
- Zero line crossover: When the AO crosses above the zero line, it is a bullish signal indicating that momentum is shifting to the upside. Conversely, if the AO falls below the zero line, it is a bearish signal indicating that momentum is shifting to the downside.
- Twin peaks setup: If the AO forms two peaks with the second peak higher than the first, it is a bullish signal. On the other hand, if the AO forms two peaks with the second peak lower than the first, it is a bearish signal.
- Saucer setup: If the AO forms a “saucer” shape with the bars moving from negative to positive values, it is a bullish signal. Conversely, if the AO forms an inverse saucer shape with the bars moving from positive to negative values, it is a bearish signal.
These signals are helpful for identifying potential trends and reversals in the market. However, it is important to use other indicators and analyses in conjunction with the AO to confirm any signals before entering trades.
Take a look at the table below for a quick reference guide on how to interpret signals using the Awesome Oscillator:
| Signal | Interpretation |
|---|---|
| AO crosses above zero | Bullish signal |
| AO crosses below zero | Bearish signal |
| Twin peaks with second peak higher | Bullish signal |
| Twin peaks with second peak lower | Bearish signal |
| “Saucer” shape with bars moving from negative to positive values | Bullish signal |
| Inverse “saucer” shape with bars moving from positive to negative values | Bearish signal |
By understanding how to recognize these signals using the Awesome Oscillator, traders can make more informed decisions and increase their chances of successful trades.
How to use the awesome oscillator for divergence trading
Divergence trading is a popular forex trading strategy which makes use of oscillators like the awesome oscillator. Using the awesome oscillator for divergence trading involves identifying instances where the price of an asset is diverging from the oscillator’s trend, indicating a potential reversal in the market.
- Step 1: Identify the trend – Before using the awesome oscillator for divergence trading, it’s important to determine the market trend. Identifying the trend involves analyzing price action using technical tools like moving averages, trendlines and support/resistance levels to determine the overall market direction.
- Step 2: Plot the awesome oscillator – After identifying the trend, plot the awesome oscillator on your chart. The oscillator can be found in most trading platforms under the “oscillator” tab.
- Step 3: Look for divergences – Divergences occur when the price of an asset is moving in the opposite direction of the oscillator trend. To identify these divergences, look for areas where the price is making higher highs or lower lows while the oscillator is making lower highs or higher lows respectively.
- Step 4: Confirm the divergence – Before entering a trade based on a divergence, it’s important to confirm it using other technical tools. This can be done by checking for price action signals like engulfing patterns, doji candles, or other technical indicators.
- Step 5: Enter the trade – Once the divergence is confirmed, enter a trade in the opposite direction of the trend. This involves selling if the price is making higher highs and buying if the price is making lower lows.
Using the awesome oscillator for divergence trading can be a powerful tool in a trader’s toolset. When used in conjunction with other technical analysis tools, it can result in profitable trades and better market insights.
Combining the Awesome Oscillator with Other Technical Indicators
Although the Awesome Oscillator can be used as a standalone indicator, combining it with other technical indicators can enhance its effectiveness and provide more reliable signals. Here are some technical indicators that can be used together with the Awesome Oscillator:
- Moving Averages: The Awesome Oscillator and moving averages can be used together to identify trend reversals. When the AO crosses above or below the moving average, it can signal a potential trend reversal.
- Relative Strength Index (RSI): The RSI is used to measure the strength of the current trend, and when combined with the Awesome Oscillator, it can provide stronger signals. A bullish AO crossover above the zero line, coupled with an oversold condition on the RSI can indicate a strong buying opportunity, while a bearish AO crossover below the zero line, coupled with an overbought condition on the RSI can indicate a strong selling opportunity.
- Bollinger Bands: This indicator can help traders identify potential price breakouts, and when combined with the Awesome Oscillator, it can provide more reliable signals. When the AO crosses above or below the upper or lower Bollinger Band, it can signal a potential breakout.
Combining the Awesome Oscillator with the above mentioned technical indicators, along with proper risk management, can be an effective strategy for forex trading.
Example:
| Date/Time | AO Value | 20-period MA | RSI Value | Bollinger Bands |
|---|---|---|---|---|
| 1/1/2021 9:00 AM | 0.012 | 0.009 | 35 | Breakout above upper band |
| 1/1/2021 10:00 AM | 0.045 | 0.023 | 74 | Price retraces back within bands |
| 1/1/2021 11:00 AM | -0.022 | -0.015 | 48 | AO crosses below lower band |
In this example, the AO was combined with Bollinger Bands to identify potential breakouts. At 9:00 AM, there was a bullish crossover above the upper band, indicating a potential bullish breakout. However, price retraced back within the bands and at 11:00 AM, there was a bearish AO crossover below the lower band, indicating a potential bearish breakout.
Using the Awesome Oscillator to Confirm Market Entry and Exit Points
When it comes to trading in the forex market, timing is everything. You need to know when to enter and exit a trade to maximize your profits and minimize your losses. The awesome oscillator is a popular technical indicator that can help you confirm your market entry and exit points.
- The awesome oscillator measures the market momentum by comparing the recent prices with the previous prices.
- If the current price is higher than the previous price, it indicates bullish momentum, and if it is lower, it indicates bearish momentum.
- The oscillator is plotted as a histogram below the price chart, and the bars change color depending on the direction of the momentum.
So how can you use the awesome oscillator to confirm your market entry and exit points?
- Market Entry: When you are looking for a buy opportunity, wait for the histogram bars to change from red to green. This indicates a shift in momentum from bearish to bullish. Enter a long position when you see this confirmation.
- Alternatively, when you are looking for a sell opportunity, wait for the histogram bars to change from green to red. This indicates a shift in momentum from bullish to bearish. Enter a short position when you see this confirmation.
- Market Exit: When you have entered a trade, use the awesome oscillator to confirm your exit point. If you are in a long position, watch for the histogram bars to turn red. This indicates a shift in momentum from bullish to bearish, and it may be time to exit the trade. Conversely, if you are in a short position, watch for the histogram bars to turn green, indicating a shift in momentum from bearish to bullish.
By using the awesome oscillator to confirm your market entry and exit points, you can increase your chances of success in forex trading. However, it’s important to remember that no strategy is foolproof, and it’s always a good idea to have a solid risk management plan in place.
| Pros | Cons |
|---|---|
| Easy to read and interpret | May produce false signals in choppy markets |
| Effective in trending markets | May be less effective in range-bound markets |
| Can be used in conjunction with other indicators | Should not be used as the sole indicator for trading decisions |
Overall, the awesome oscillator is a useful tool for confirming market entry and exit points. Just remember to use it in conjunction with other indicators and to have a solid risk management plan in place.
Setting Up the Awesome Oscillator on a Trading Platform
If you are using a trading platform that offers the awesome oscillator, setting it up is easy. Follow the steps below to add the indicator to your chart.
- Open your trading platform and select the currency pair you want to trade.
- Click on the indicators tab on your platform.
- Search for the awesome oscillator indicator and click on it.
- Customize the settings according to your preferences. Usually, the default settings work just fine.
- Apply the indicator to your chart.
Once you have set up the awesome oscillator on your trading platform, you can start using it to analyze the market and make trading decisions.
Below is a table explaining the default settings of the awesome oscillator on most trading platforms:
| Indicator | Periods | Color |
|---|---|---|
| Awesome Oscillator | 5 and 34 | Red and Green |
Remember that you can customize these settings based on your trading strategy and preferences.
Top trading strategies with the awesome oscillator
The Awesome Oscillator is a popular technical indicator that combines momentum and trend-following strategies to analyze market movements. One of its most notable features is its ability to help traders identify trade setups and establish entry and exit points. Here are some of the top trading strategies with the awesome oscillator:
- Zero-line crossover: This strategy involves monitoring the oscillator’s movements across the zero-line. When the oscillator crosses above the zero-line, it indicates bullish momentum, while a cross below the zero-line implies bearish momentum. Traders can use these readings to enter and exit trades based on market sentiment.
- Saucer setup: This setup occurs when the indicator bars move from negative to positive values, indicating a bullish trend. To take advantage of this setup, traders can initiate long positions or consider adding to existing long trades. The saucer setup is useful for catching trend reversals and can provide valuable trade entry signals.
- Twin peaks setup: This setup occurs when the oscillator generates matching peaks or valleys, indicating a potential trend reversal. The twin peaks setup is a reliable signal that traders can use to initiate counter-trend trades or exit existing trades before a trend reversal occurs.
Awesome Oscillator trading examples with supportive table
Let’s take a look at some examples of how to use the Awesome Oscillator in your trading strategy:
| Date | Pair | Action |
|---|---|---|
| January 1, 2021 | EUR/USD | Long |
| January 15, 2021 | EUR/USD | Exit Long |
| January 20, 2021 | EUR/USD | Short |
| February 5, 2021 | EUR/USD | Exit Short |
In this example, a trader used the zero-line crossover strategy to enter a long position on the EUR/USD currency pair on January 1, 2021, when the oscillator crossed above the zero-line. The trader closed the position on January 15, 2021, when the oscillator crossed below the zero-line, indicating a potential trend reversal.
The trader then used the twin peaks setup to enter a short position on January 20, 2021, when the oscillator generated matching peaks, indicating a potential reversal. The position was closed on February 5, 2021, when the oscillator generated a bullish crossover.
Overall, the Awesome Oscillator is a powerful tool that can help traders identify market trends and make informed trading decisions, regardless of the strategy employed. By incorporating the oscillator into their trading plans, traders can gain a better understanding of market movements and develop profitable trading strategies.
Common Mistakes to Avoid When Using the Awesome Oscillator in Forex Trading
Although the Awesome Oscillator is a widely used technical indicator in forex trading, traders may fall into some common mistakes that may lead to losing trades. Here are the top mistakes to avoid when using the Awesome Oscillator:
- Not understanding the indicator – Before using any technical indicator, it is crucial to understand how it works. The Awesome Oscillator is designed to highlight the market’s momentum based on a difference between two simple moving averages. Traders need to know how the lines are plotted and what signals they generate.
- Wrong interpretation of signals – The Awesome Oscillator generates two types of signals, bullish and bearish. Some traders may misinterpret these signals and enter the market at the wrong time. It is important to use other technical analysis tools to confirm the signals generated by the oscillator.
- Using the indicator in isolation – Using one indicator alone may not provide comprehensive market analysis. Traders should combine different technical indicators to obtain a clear picture of the market conditions. The Awesome Oscillator can be used in combination with other indicators such as moving averages, Bollinger Bands, and the Relative Strength Index (RSI).
- Over-reliance on the indicator – Traders should not rely solely on the Awesome Oscillator to make trading decisions. The indicator is not foolproof and may not work in some market conditions. It is important to consider other factors such as economic events, news, and market sentiment before entering a trade.
- Improper use of stop-loss orders – Stop-loss orders are essential risk management tools that help traders minimize losses. However, some traders may misuse them by placing them too close to the entry point or too far away. Traders should use stop-loss orders effectively to avoid losing a significant part of their trading capital.
Failing to Adapt to Different Market Conditions
One of the most common mistakes traders make is failing to adapt their trading strategies to different market conditions. The Awesome Oscillator is a momentum indicator that works best in trending markets. When the market is ranging, the oscillator may generate false signals, leading to losses.
Traders should adjust their strategies and change their indicator settings to suit the prevailing market conditions. For example, they can use a longer time frame to reduce false signals in a ranging market. Additionally, traders should be patient and wait for clear signals before entering a trade.
Ignoring Risk Management Principles
Risk management is a critical aspect of forex trading that should not be ignored. Traders should always have a solid risk management plan and adhere to it at all times. Some traders may overlook risk management principles when trading with the Awesome Oscillator, leading to significant losses.
| Risk Management Principle | Description |
|---|---|
| Position sizing | Determining the appropriate size of the trade based on the trader’s risk tolerance and account balance. |
| Stop-loss orders | Placing orders at predetermined levels to limit losses. |
| Take-profit orders | Placing orders at specific levels to lock in profits. |
| Diversification | Spreading the trading capital across different currency pairs or asset classes to minimize overall risk. |
By following these principles, traders can minimize their losses and protect their trading capital.
FAQs about How to Use Awesome Oscillator in Forex Trading
1. What is the Awesome Oscillator?
The Awesome Oscillator is a technical indicator used in forex trading to measure market momentum. It is displayed as a histogram that calculates the difference between a 34-period and a 5-period average.
2. What does the Awesome Oscillator indicate?
The Awesome Oscillator can indicate whether there is a bullish or bearish trend in the market. Values above zero indicate a bullish trend, while values below zero indicate a bearish trend.
3. How can I use the Awesome Oscillator in my trading strategy?
Traders can use the Awesome Oscillator to identify buying and selling opportunities. When the histogram bars change from negative to positive, it may be an indication to buy, and when they change from positive to negative, it may be an indication to sell.
4. Is the Awesome Oscillator better than other technical indicators?
The effectiveness of the Awesome Oscillator depends on the trader’s trading strategy and preferences. It can be used in combination with other technical indicators to improve its accuracy.
5. Can the Awesome Oscillator be used in any type of forex trading?
Yes, the Awesome Oscillator can be used in any type of forex trading, including day trading, swing trading, and position trading.
6. Is the Awesome Oscillator easy to understand for beginner traders?
The Awesome Oscillator may take some time for beginner traders to understand, but numerous resources about its usage are available online.
7. Can using the Awesome Oscillator guarantee profits in forex trading?
No, using the Awesome Oscillator, or any technical indicator, does not guarantee profits in forex trading. It is still important to use proper risk management techniques and to have a solid trading strategy.
Closing Thoughts
Thanks for reading this guide on how to use the Awesome Oscillator in forex trading! Remember that the Awesome Oscillator can be a powerful tool in identifying market trends and buying or selling opportunities, but it is important to use it in conjunction with other technical indicators and to manage risk effectively. Keep learning and practicing to improve your trading skills, and visit our website again soon for more forex trading resources!