Trading the Awesome Oscillator

The Awesome oscillator was developed by Bill Williams, part of his series of ‘Chaos Theory‘. Bill Williams went on to develop various indicators as part of this ‘5-market dimensions‘. Some of the other well known indicators from Bill Williams include the Williams Fractal, Alligator, Awesome Oscillator.

The Awesome oscillator is commonly found on many charting platforms and is used to measure momentum. The awesome oscillator is identified by its histogram which oscillates around the 0-line. When the awesome oscillator (AO for short) rises above the 0-line, it indicates positive momentum and when it drops below the 0-line, it indicates negative momentum. Trade signals are taken based in reference to the AO’s 0-line.

Calculating the Awesome oscillator

The Awesome Oscillator calculates the difference between a 34 and 5 period simple moving averages based on the (High+Low/2) factor. In fact, traders can plot a 34 and 5 period moving average calculated on HL/2 and notice how the AO plots the histogram in conjuction with how the moving averages respond to price.

The chart below is one such representation.

Bill Williams, Awesome Oscillator
Bill Williams, Awesome Oscillator

Notice the up and down arrows which correspond to the moving average crossovers and aptly represented by the AO histogram, moving above the 0-line and below the 0-line respectively.

The AO indicator is so simple that it doesn’t require any additional settings.

Awesome Oscillator – Buy/Sell Signals

There are a standard set of buy/sell signals that are commonly found on the Internet in articles about the Awesome oscillator. We summarize these signals here for reference.

  • Saucer Buy
  • Saucer Sell
  • 0-line buy/sell (Buy when AO rises above 0-line or Sell when AO dips below 0-line)

Besides the above obvious signals, AO can also be used to trade divergences. The chart below shows a bearish divergence of price to the AO and the subsequent drop in price.

Bearish Divergence with AO Indicator
Bearish Divergence with AO Indicator

To learn more about the various divergences, click here. The concept of trading divergences with AO remains the sames (as with RSI, as indicated in the divergence article).

Using the AO indicator

The Awesome oscillator is an ideal oscillator to use alongside moving averages as it can be used to trade divergences with the price relation to the moving average acting as a filter for trades. Further to the fact that the AO’s histograms are easy to read. Traders should note that an AO histogram is valid only upon the close of the bar. It is one of the common mistakes made by traders who interpret the latest AO histogram bar before the bar is closed.