Awesome oscillator (AO) is a financial instrument of indicators series from famous trade guru Bill Williams. To create AO, Bill took a histogram of popular MACD indicator, improved configurations and finalized the instrument graphic perception. This oscillator, like its analogue, calculates driving market force, based on difference between two lines.
Overview and regulation of indicator AO
User needs to click on indicators menu and select AO from list to select and start using oscillator in IQ Option trading room.
In indicator settings window, for user is presented with two periods as variables. These are parameters of calculated curves. The default parameter: 34; 5.
Attention! Bill Williams suggested these settings as optimal. Therefore, users should not change them without a special reason.
Oscillator is presented in histogram form with green and red bands in a specially selected area under the price chart. Histogram green bands confirm growing trend, and red is shows a downtrend.
The operating principle of awesome oscillator
AO indicator formula consists of one arithmetic operation: difference of two curves with periods shifted from real price is calculated.
Oscillator operates according to following logic:
- when are green bands of histogram move away from zero mark upwards is a bullish trend is gaining momentum on market;
- reaching the peak area and beginning of histogram direction change on oscillator means that price movement slows down and correction occurs;
- when are red falling bands crossing zero mark and continuing movement is a growing bearish trend.
Trading signals of the indicator AO
1) Saucer. Oscillator histogram unfolds a descending direction, figuratively forming a saucer.
Terms for the buy signal: three bands placed above zero. First and second bands should be red, and third band is green. The deal must be concluded on the third band.
Traders often use as a signal for sale, the so-called inverted saucer. The conditions in this case are equal to opposite: histogram passes below zero, first and second bands are green, and third band is red.
2) Crossing the zero mark. When histogram of indicator crosses the zero mark then signals for deals is formed. And, if graph passes the zero mark from top to bottom, first band after intersection is signal band (for sale).
If histogram passes through zero from the bottom up, then first band after transition is signal (for purchase).
3) Two peaks. This is another type of signal that is generated by the AO indicator. Terms for making a deal:
- the histogram passes above zero, forms the second peak in a row;
- the second maximum is lower than previous one;
- the sell signal is the red band of histogram, which is confirming the second peak.
Signal conditions for purchase are equal to opposite:
- the histogram passes below zero and forms two vertices;
- the second peak is higher than previous one;
- signal for purchase is a green band, which confirming the second maximum of oscillator chart.
Summary
Awesome oscillator has been a reliable assistant in trade for more than 40 years. And it’s no accident. Many traders have already grown rich thanks to forecasts that were built with this instrument. But do not rely only on oscillator signals. The market could not be subordinated to anyone yet. AO indicator is rarely used in its pure form. Traders combine oscillator signals with different technical analysis instruments to ensure greater accuracy of forecasts.
NOTE: This article is not an investment advice. Any references to historical price movements or levels is informational and based on external analysis and we do not warranty that any such movements or levels are likely to reoccur in the future
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