The Awesome Oscillator: Strategies & Uses

In this tutorial, we'll talk about all the signals the indicator gives and share reliable trading strategies.

What Is the Awesome Oscillator Indicator: Definition

The awesome oscillator is a momentum indicator and one of the leading market indicators that many traders use. The main idea is to compare recent price moves to historical movements.

The awesome oscillator is a momentum indicator. The main idea is to compare recent price moves to historical movements.

The awesome oscillator indicator was developed by the well-known trader Bill Williams. Most likely, you've used his indicators, such as the Alligator, the Gator Oscillator, Fractals and the Market Facilitation Index. Traders apply all of Williams' indicators to confirm trends and find reversal points. 

Example

Let's explore what the indicator looks like on the daily chart of the EUR/USD pair below.

The green bars are bullish, while the red bars are bearish. 1 is the zero line, which will play a significant role in trading strategies.

The Awesome Oscillator Indicator: Calculation

Although the awesome oscillator is calculated automatically, it's worth knowing how the indicator is built.

The formula is simple: 

To calculate the awesome oscillator indicator, you need to subtract a 34-period simple moving average of median prices from a 5-period SMA of median prices. We aren't providing a precise period for moving averages because the indicator can be applied to any period. 

Simultaneously, moving averages are not calculated based on close prices but rather on the midpoints of each candlestick used. To get a midpoint, you need to add the session's high and low prices and divide the sum by two:

Awesome Oscillator: Catch Its Signals

The indicator provides a wide variety of signals. That's why traders all around the world use it. Let's consider the signals you can catch applying the awesome oscillator indicator on the price chart.

There are four main indicator's signals: the zero-line crossover, twin peaks, saucer and divergence.

Signal 1

On the chart at the beginning of our article, you can see that the indicator moves around the zero line. If bars rise above the zero-level, it's a signal of upward movement. If the indicator falls below the zero line, we get a bearish signal.

Signal 2

When the awesome oscillator forms two tops above the zero line, and the trough between highs is above 0, it's a sign of downward movement. At the same time, the second top should be closer to the zero line and lower than the first peak. There should be bearish bars after the second peak. 

On the other hand, if the AO indicator's lows and the trough between them are below the zero line, it's a buy signal. The second low should be closer to the zero line and above the first one. The second bottom is followed by bullish bars.

Signal 3

The next signal has a specific name: saucer. It's a three-bar pattern. 

• The bullish pattern has one bearish bar; the next bar is also bearish but smaller; the third bar should be bullish. All the bars are above the zero line. 
• A bearish pattern is represented by the first bullish bar; the second bar is also bullish but smaller than the first one. The third bar is bearish. All the bars are below the zero line.

Although the awesome oscillator indicator is quite reliable, there is no indicator that provides 100% accurate signals. Thus, we recommend using the chart, candlestick patterns and other indicators to confirm the AO's signals.

Signal 4

The fourth signal is divergence. You may know that many oscillators are used when defining convergence/divergence between the price chart and the oscillator. MACD and RSI are widely used for that.

You can also apply the awesome oscillator indicator to find a divergence with a price chart. All you need to do is draw a line between the two tops/bottoms of the price and the oscillator. If they diverge, it's a signal of the upcoming market direction. To learn more about convergence/divergence, read our guide. 

The Awesome Oscillator Strategy: Top Choice

The awesome oscillator indicator can be used for any asset and on any timeframe. Thus, it's implemented in a wide range of strategies. Let's look at the most reliable ones.

Bullish/Bearish Saucer Strategy

If you read our article carefully, you'll remember that the saucer signal is based on three bars.

• Step 1. Find the formation of a saucer signal. It can be either bearish or bullish. We found a bullish saucer on the daily chart of the EUR/USD pair.
• Step 2. You can open a trade at the formation of the third bar. However, it could be an unconfirmed signal. That's why we recommend opening a trade after the bar is formed. In our case, we would open a long trade.
• Step 3. The Take Profit level is not identified precisely in this strategy. However, you can close the trade as soon as the AO moves in the opposite direction.
• Step 4. The Stop Loss order is determined by the risk/reward ratio.

Twin Peaks of Awesome Oscillator

As with any strategy, two peaks provide signals for bearish and bullish positions.

• Step 1. Define whether twin peaks are bullish or bearish. When we have bullish peaks, the awesome oscillator indicator is below the zero line. In the case of the bearish peaks, the AO is above 0.

If it's a bullish signal, the second low should be higher than the first one. With a bearish signal, the second top is lower than the first peak.

An important condition is that the histogram after the second low should also be bullish in a bullish signal. In contrast, in a bearish signal, the histogram after the second peak should also be bearish.

• Step 2. Open a trade after the formation of the second low/high. 
• Step 3. The Stop Loss order can be placed several pips below the second low/above the second peak.
• Step 4. The Take Profit level can be counted according to the risk/reward ratio.

Bullish/Bearish Zero Line Crossover

As we mentioned above, the crossover of the zero line is also a signal for traders.

• Step 1. Find a moment when the awesome oscillator crosses the zero line upside down for a short trade and bottom-up for a long trade.
• Step 2. The signal will be more reliable if there are at least three bullish bars before the bullish crossover and at least three bearish bars before the bearish crossover.
• Step 3. Open a trade on the crossover.
• Step 4. The Take Profit level is not defined precisely. Close the trade as soon as the AO turns around, or there is a reversal signal from candlestick or chart patterns.
• Step 5. The Stop Loss order can be indicated by the risk/reward ratio.

The Awesome Oscillator Trading Strategy: Divergence

We previously talked about divergence. Now, let's look at a real example and make a trade using divergence. You can see the signals divergence provides below. 

Look at the chart below. 

• Step 1. Apply the awesome oscillator and the RSI indicator on the chart. A great advantage of the divergence strategy is that it can be used on any timeframe you trade. We used a daily chart of the EUR/USD pair.
• Step 2. Look for a divergence. We found a regular bearish divergence. Why did we implement two indicators? Because it's vital to confirm signals. We got a divergence between the price and the awesome oscillator and RSI indicator. Also, the RSI indicator crossed the upper boundary of the 70 level from the top downward. 
• Step 3. Open a short position as soon as you get signals of downward movement. 
• Step 4. The Stop Loss can be placed several points above the latter pick.
• Step 5. We recommend using Trailing Take Profit. The first target can be defined by the risk/reward ratio. The reward should be at least two times bigger than the risk. The TP level can be increased if you're sure the market will keep going down.

The opposite steps are applied for a bullish divergence. 

Find Awesome Oscillator in MetaTrader 4

A big advantage of the Awesome Oscillator is that it's easy to apply it to the price chart.

If you're trading in MetaTrader, here are several steps to implement the oscillator on the chart. The AO is a standard tool. To add the indicator to the chart, click 'Insert'', then choose 'Indicators'. Bill Williams deserved a separate tab in MetaTrader, so click 'Bill Williams' and choose 'Awesome Oscillator'. 

The awesome oscillator is one of the best indicators because it doesn't require settings to be changed. All you can change is the colour scheme.

The awesome oscillator is one of the best indicators because it doesn't require settings to be changed. All you can change is the colour scheme. Green (for bullish bars) and red (for bearish bars) are used most often, but you can choose any colour. It's important you remember what the colours mean.

The Awesome Oscillator Indicator: Reliable or Not?

The awesome oscillator is one of the most reliable indicators, and here's why:

• The AO is a market momentum technical indicator.
• It can be used for identifying trend reversals and corrections.
• The indicator provides entry and exit levels.
• There are four main signals you can catch: the saucer, divergence, twin peaks and zero-line crossover. 

Although settings don't need to be changed, the AO provides many signals. That's why it's vital to practice before entering the real market. To do that, you can open a Libertex demo account, which includes a wide variety of underlying assets on CFDs. 

Let's summarise what we've learned.